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Buying Reo Properties

What kind of surprises can  you expect in an REO?

Foreclosure signs, Mortgage crisis,

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What exactly is an REO? The term is Real Estate Owned and refers to real estate that is owned by a bank following the foreclosure of real property. Unfortunately national banks today have thousands of these properties listed as asset’s in the bank’s portfolio. Many of them are far from “assets”.

Until a few years ago only a few people within a national bank handled the REO properties because there were very few of them. More recently with the onslaught of foreclosures these banks have had to hire hundreds of new employees to deal with REO properties. Territories are assigned and an asset manger begins the daunting task of finding Realtors to list and sell the  REO homes. The bank’s goal is to get these “assets” converted to cash and off their books as fast as possible. They do not want the continued liability and risk presented by home ownership.

 
 

Are The Banks Almost Giving These REO Properties Away?

But having said all that, the banks still have to account to their Board of Directors and the shareholders. So they will try to get as much for the REO property as possible. Only when the home has been listed for some time will they lower the price and begin to negotiate to resolve the sale.

Therefore if you are looking to buy an REO remember you are not dealing with a traditional seller, but rather an institution that is only interested in preserving their “cash asset”.  The asset manager has no knowledge of the REO property, the owner (the bank) has never occupied the property and will sell all properties “as is”. Most often meaning that ‘what you see is what you get’ and they will be unwilling to make any repairs. They want to be done with the property when it is sold and will almost always require a lengthy addendum to be signed by the buyers in addition to the state sales contract. This addendum more often than not will supersede the state contract.

Often the REO title will have issues and it is important to identify them right away. The foreclosure did remove liens and second and third mortgage interests. But the banks hire out the title services by bids …and the lowest contractor gets the bid. Sometimes there are procedural problems where the title was not foreclosed properly, or notice was circulated incorrectly or even that the foreclosure went forward while there was a bankruptcy procedure in process. Easements for right of way, ingress and egress or shared wells can be missed entirely.  The foreclosure will not eradicate ad valorem taxes or even title issues that existed prior to the foreclosure.

 
 

What Condition Will A REO Property Be In?

Always have a home inspector go through the REO, once you know what issues you face you can make a decision about whether or not to proceed with alt="reo"the purchase. It is too late to do anything about these issues once you have moved beyond the inspection period allowed by the bank for the property.The fees charge by home inspectors is worth it for peace of mind.

In some cases an appraiser will call something in the report that will stop the home from being financed, depending on the bank and the specific issue the foreclosing bank may repair the item to move the REO property to closing.  But equally, they can refuse and the property will sale fail, as the buyer you will not be obligated to complete the sale.

It is a good idea to purchase owner’s title insurance to protect your interests, that the title is clean. Always get the locks changed as there are common keys used by the service industry for REO properties with no control over who has those keys. And consider getting a home warranty when you buy an REO  – for the unexpected problems.

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Remember the phrase “Buyer Beware” is particularly true with REO properties.

About the author

Sherry Fields Sherry Fields has been working in real estate since 2002. Working with the development team for the Hilton Garden Inn gave her strategic information on the commercial real estate market in Missoula. Broadening her scope she moved into the residential market and earned the designation SFR in short sales and foreclosures. Currently affiliated with Prudential Montana Real Estate, she works with both buyers and sellers "building relationships so you can buy & sell with confidence". Sherry Fields has recently earned the CREN designation - Certified Real Estate Negotiator. While price is a large part of negotiation - it is also about timing everything from the closing date to inspections, appraisals, home insurance - and it is about negotiating items that can show up in home inspections to achieve a mutually acceptable outcome.

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