REO Real Estate

REO Property or lender owned property is real estate the lender now owns due to foreclosure. More and more REO property will be on the open market for the next two or three years. Buyers may think buying REO property is a great bargain. And it may be, but this type of property is not for every buyer. In most cases the property will be vacant and one can expect the property to be in neglect to down right in shambles. So a buyer must have a good eye when looking at these properties and have the ability to see through the mess.  A buyer may be getting a bargain, but for sure several thousand dollars will be needed to bring the property back to live able or marketable standards. I most cases these are not move-homes.

Hiring a Buyer’s Agent

In many cases buyers may find REOs on their own through newspaper ads or signs on the properties. A buyer will be smart to first contact a real estate broker that will be their broker and act solely on their behalf. Dual agency is legal in the state of California. Dual agency is one agent acting on behalf of the seller and the buyer. It is nothing less than foolish for a buyer to let that happen. A buyer needs an agent that works for only them and is protecting their interests for only them. Don’t forget in most cases the buyer’s agent is paid by the seller’s agent.

Negotiating with REOs 

Most buyers may think that a lender is anxious to get rid of an REO property. They are, but they are not going to give it away and they try very hard to minimize their losses due to the foreclosure.  If a buyer has had the experience of purchasing property in the past, purchasing an REO is very different. Lenders like to call the shots. In essence what they are saying is “we are selling this property at this price in an “as is” condition and you are going to buy it at our terms”. Generally the way the process works is this. 1) The buyer’s agent will send an offer to the lender’s agent. 2) The buyer’s agent then will most likely receive an addendum(s) to the buyer’s purchase agreement prepared by the lender (seller) which states the terms under which they will sell this property to the buyer. 3) The buyer’s agent may also receive documents that state that the property has received multiple offers. They ask the buyer to state on one of the seller’s documents the buyers “final and best offer”. That will give the buyer the opportunity to increase their offer price if they choose to do so. An important point to remember is that many of the addendums that the sellers asks the buyer to sign, are not documents that most buyer’s agents are familiar with. The buyer’s agent should advise their clients of that fact and suggest that they seek advise from a real estate attorney although many buyers are comfortable with these addendums without attorney advise. Buyers should also be advised that the REO market is starting to show a lot of competition. There are many buyers looking for REOs and actively bidding on them.

In most cases when an REO property is first listed, the listing price is what the lender is looking for. They believe they have listed the property at a price that takes into account the condition of the property. It will not be time well spent by the buyer offering a price that is substantially below asking price. Most lenders will just not do it. So if a buyer thinks that the asking price is way out of line, then it might be wise to either wait for a month or two or start looking at REOs that have been on the market for 90+ days. The seller tends to become a lot softer to entertaining lower offers when on the market for any length of time.

A buyer needs to be ready to go with an REO purchase. They must have a pre-approval from their own lender. Most sellers will not let an escrow go longer than 30 days. If a buyer is paying all cash, most sellers will expect the buyer to close escrow in no longer than 14 days. And that buyer must show at the time of the offer proof of funds to close escrow. In both case when an offer is accepted and a date is agreed upon for close, the seller expects the buyer to close on that day. If a buyer asks for an extension, the seller is most cases will charge the buyer a per diem amount per day until the close.

What REO seller’s will not do

1. A buyer is wise to have a professional inspection of the property 

There may be other conditions that the seller will not accept and the buyer needs to look at those on a case by case basis.
 

2. The seller will not pay for a termite reportor any repairs associated with that report. the buyer is wise to get their own termite inspection

3. If the property is no legally permitted, the seller will not pay expenses to bring the property to code. It is the responsibility of the buyer to investigate possible permit code violations.

4. The seller will not pay for the property to be in compliance with local ordinances. The city of San Diego for example requires that when property is sold, the property must have low flow toilets. Buyers must accept that responsibility.

5. Buyers should not expect the seller to pay for any of the buyer's closing costs.

6. Sellers will not accept an offer that is contingent on the sale of another property tht is owned by the lender.

7. There are many disclosures that an REO seller is not legally obligated to provide to a buyer. The buyer's agent can advise the buyer what disclosures not to expect.

8. If the Property is a condominium or a planned unit development, the buyer, at the buyer's expense, is responsible for obtaining and reviewing the covenants, conditions and restrictions, and bylaws.
 

REO sales are not for every buyer. However if a buyer really knows what they are doing and have expertise themselves or have someone that does, they can probably find great a bargain in buying an REO.