Real Estate Owned (REO) properties can seem like an attractive purchase but you'd better understand exactly what you're getting before you buy them or you could be sorry. These types of properties are often owned by lenders such as banks, credit unions, mortgage companies, and other businesses.
"Every day you pick up a paper, there's something about foreclosure issues, people losing their homes, and all of those terrible situations people are facing because of the mortgage meltdown, the slow-down of the real estate market, and all that's going on," says Jim Park, President and CEO of New Vista Asset Management.
His company is working with Fannie Mae (Federal National Mortgage Association) to market foreclosures as affordable housing for minority and low-to-moderate-income families. The strategy involves working with a national network of real estate professionals to market and sell REO properties to mortgage-ready, first-time and minority/immigrant homebuyers. The goal is to help them get into homeownership using responsible and affordable loans so that the REO properties are not just sold to investors who will try to later sell them for a profit.
"We believe our partnership will demonstrate a more responsible way to sustain homeownership opportunities within the minority communities," says Park.
With an influx of foreclosures, lenders are ending up with real estate property they don't want. That has some buyers seeing a prime opportunity to either get into the real estate market for the first time or to bolster their real estate portfolio.
"This year the foreclosure numbers are double that of last year. It is expected that next year it'll be double that of this year at least. So the numbers are just climbing at a national level," says Park.
Under most laws, when the property is still in the pre-foreclosure and auction phase, the lender/bank is only entitled to its losses and expenses but not to a profit from the sale of the property. That changes when, following foreclosure, it becomes Real Estate Owned property by the lender or bank.
Park says lender-or-bank-owned properties can be a great starter home for first-time buyers because they generally will sell for a lower price than the typical resale market home. But, remember even though lenders or banks don't want the property; they are just like traditional sellers in that they also want the highest price that they can get for the home. And since now the property is owned outright by the lender/bank, it can make a profit.
Buying directly from the lender/bank can be easier than purchasing a pre-foreclosure home or buying it at a foreclosure auction, although better deals are often more likely with the previous two.
Buying REO properties from the lender/bank can be safer but also a bit tricky. It's important not to jump right in without first knowing exactly what you're getting into as there can be added risk involved. It's equally important to employ the right experts to assist with your purchase.
"Just because you're buying a bank-owned property doesn't mean you should not have a Realtor -- you should. [The agent] is going to protect your rights and try to get you the best deal possible," says Park.
The agent can run a report to show you comparable sales and let you know if the foreclosed property is selling for a good price.
"If you look at the national average of comparable homes that are bank-owned as opposed to just typical resale, the bank-owned property, depending on the market, is probably about 15 to as much as 30 percent lower in cost than your typical resale," says Park.
But before you get too excited about an incredible deal, Park warns that you should understand why these properties are lower.
"The problem is there are some risks because most REOs are sold AS IS," says Park.
Just as with traditional home sales, this is why an excellent home inspector is a must. It's critical to know how much of a margin you will need to budget for the property.
"It's key to know what you're buying. Have that home inspector check everything out. Know the potential added costs of fixing things up, rehabbing the property, and so you need to make sure you go in with some additional cushion (a little extra pocket change) to fix up that property. Don't go into that home and just charge up your credit card to fix the leaky faucet or [anything else]; just go in and budget that into the purchase price," says Park.
REO properties also vary from traditional home resale properties in the length of time it takes to buy one. You have to have a little more patience says Park.
"For instance, you make an offer and sometimes it takes a little bit more time and that's the difference between an REO purchase and [buying from a homeowner]. The homeowner may give you an answer overnight; 'Okay, I'll take that deal.' But with the bank-owned property, sometimes it could take days or weeks because it has to go through a lot of layers to get that approval," explains Park.
Before the REO property is sold, lenders will typically take care of the removal of tax liens and evict occupants if necessary. In general, most REOs are free of title-related issues but you still should have research and a title search done on the property. Make sure you also request an appraisal.
If you have the patience, the right attitude, and experts on your side, you may find an REO property is exactly the deal you've been waiting for.