What Should I Know About REOs Before I Make an Offer to Purchase One?
Buying REO property (real estate owned) can be very different from typical "arms length" real estate transactions and conditions. While it is true that some excellent bargains can be had by purchasing bank REO property, there are also a number of questions to be answered before the casual buyer becomes involved. Here are a few of the questions you should ask and get satisfactory answers for.
- What is the current condition of
the REO property? Should you consider buying a house at foreclosure
- before it becomes a bank REO property - this questions is
critical. If you're thinking about another REO property - one that
has already been foreclosed upon - you still need to know its
condition. Most REOs need major TLC to improve their condition and
many may need extensive - and expensive - repairs (heating systems,
roof, termite removal, new appliances, etc.). Former owners were
unable to afford the mortgage payments. It is understandable that
most were even less financially able to perform required
maintenance, repairs, or needed improvements. Your perceived
"bargain" many become anything but a good
deal.
- What is the current status of
the REO property title? Like the above noted concern, former
homeowners unable to afford mortgage payments may also have liens
that cannot be eliminated through foreclosure (e.g., IRS tax liens).
Even serious problems with the "chain of title"
sometimes occur, making it difficult to obtain a
"clear" title without spending large dollars.
Whether you're considering using a bank REO property for your
primary residence or to rehab and resell it to another for a healthy
profit, you'll need to have an unencumbered title to enjoy real
property ownership.
- What is the REO property worth "as is"? Having a good idea of a property's FMV (fair market value) "as is" is critical to your interest in making a purchase offer. Trying to estimate the value of a bank REO property "as is" may prove challenging. Compiling some asking or recent selling prices of similar homes in the same neighborhood will probably not give you useful information. These homes are being sold as "arms length" transactions (the amount a willing, informed buyer will pay for a property). Buying a foreclosed or REO property can be very different because of deficient physical condition or title problems. Talk with real estate agents and REALTORS® to get their informed opinion. If you've been successful in learning the physical condition and title issues about a bank REO property, you can share this data with real estate agents. Experienced REALTORS®, who know the neighborhood, can then give you an opinion of value "as is" and "as rehabbed". This information helps you determine in what price range your offer should be and what value you might expect for a FMV after you make necessary repairs and upgrades.
Understand that it can be dangerous to assume that all bank REO property is a bargain. Don't forget, the mortgage lender has had to incur many fees before, during, and after foreclosure, including collection, attorney, advertising, utility, and insurance fees. They may or may not have injected other funds into the REO property for repairs and upkeep. They want to be reimbursed, if possible, upon selling the house. Do your homework. You'll learn if REO property you're considering is worth what you'd like to pay for it.
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What Is The Difference Between Buying at Foreclosure or Purchasing a Bank REO Property?
Many people assume that buying a home at the foreclosure is the same as buying an REO property. In some cases, there may be little difference in price or condition. However, in many situations, there are differences that may influence both the price must pay and your interest level.
The most important potential difference and consideration is the true "as is" selling price. In some situations, this difference is wide. Here are some issues for you to consider.
- Buying real estate at
foreclosure typically means you're purchasing in
a total "as is" environment. No warranties or
guarantees - either stated or even implied - are available. The
first mortgage lender - sometimes the second and third lender (if
they exist) - will be present and possibly bidding on the real
estate. Lenders, of course, know how much money they want and need
from a buyer. That amount typically includes the outstanding balance
of the loan, all accrued and unpaid interest, AND all expenses of
the foreclosure process (collection, lawyer, advertising, and filing
fees). They have little concern for the condition of the property,
including repairs and improvements needed. Except for a brief
physical inspection period just prior to the foreclosure auction,
you will be buying not only that which you see, but whatever unseen
problems the house may have. You also may - or may not - be advised
of any title problems, including outstanding liens that cannot be
discharged through a foreclosure sale, like an IRS income tax lien.
You'll typically be required to offer a $5,000 or $10,000 certified
check on the spot and have a short period to complete the sale.
- Buying bank REO property is similar, but a bit different. If the bank or mortgage lender becomes the owner of the property, more requirements accrue to the financial institution. They are required to be more forthcoming with potential buyers or real estate agents about the physical condition of the house and to disclose any serious title issues. You'll have a much better idea about the condition of the REO property and, therefore, its "as is" FMV (fair market value). You should also be able to learn if any non-dischargeable liens still exist. In most cases, bank REO property will have no (or corrected) title issues as the lender will have resolved existing problems. Be aware, however, that the longer a lender has owned an REO property, they have probably had other carrying costs that they'll want to include in the selling price. For example, if the house is vacant, just the insurance alone can cost more than $1,000 PER MONTH, since a vacant property has no inhabitants to "protect" it from damage, e.g. vandalism, fire, etc.
As you can see, buying at foreclosure or as an REO property, a house can be a bargain, a nightmare, or, more probably, somewhere in the middle. If you do your real estate homework regarding "as is" FMVs, physical condition, title issues, and neighborhood desirability and home values, you can enjoy some excellent benefits and profits buying bank REO property.
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