Is REO a better deal if you have the money

Wednesday, March 11, 2009, AM | Leave Comment

Doing some research via my favorite search engine, I came across a phenomenon called Real Estate Owned property, or REO.

Simply stated, these properties belong to mortgage lenders, mostly banks. They outright own the property.

REO kicks in as follows:

Foreclosure begins with a homeowner’s failure to make a mortgage payment and ends on the courthouse steps, when the home is auctioned off to the highest bidder. If bidders fail to meet the bank’s minimum – usually the balance of the mortgage, the bank will buy back the home and sell it as REO. At that time, the bank owns the property as the sole owner.

A foreclosed home is brought out to the market by the bank to auction it off, which is strictly “buyer beware” properties that attract seasoned investors prepared to tackle major rehabbing and renovating.

In contrast, with an REO you get a clean title, and you don’t have to deal with a distressed homeowner, a difficult-to-evict tenant or, in some states, a mandatory redemption period during which the previous owner can try to get the home back. You will still get a deal; how good it is depends on the market.

The city with the largest discount compared with median price on REOs is the Las Vegas suburb Henderson, Nev., at 33%, according to a survey by Trulia.com, a real estate Web site, and RealtyTrac.com, an online foreclosure marketplace.

Although you can have REOs inspected before you sign a purchase contract, they are sold “as is,” so you cannot negotiate the price based on the home’s condition. The inspection merely gives you a good understanding of what is wrong with the property and gives you a basis of how much you would need to fix it.

Disgruntled homeowners who lost their property may have stripped the home of major appliances or even trashed it. While the home is vacant, it may be vandalized or inhabited by squatters or small animals. Turned-off utilities may lead to broken pipes and water damage, mold, mildew and smelly carpets.

In a Nutshell
Visit the Web site of your local multiple-listing service (or ask your real estate agent) and look for listings labeled “REO” or “bank owned.” RealtyTrac.com and Foreclosure.com offer listings of homes in foreclosure (both are available by subscription with a one-week free trial). You can see each property’s loan history, which often reveals what the previous owner paid for it at the top of the market. For Fannie Mae’s REOs, visit HomePath.com; for Freddie Mac’s, go to HomeSteps.com.

As always, understand fully what you are getting into. Do research on the property. Research homeowner papers in the town/city hall where the property is located. Do calculations on how much it would cost you to renovate and fix the property.

You can make your offer contingent on an inspection, title search, financing, appraisal and sale of your current home. However, if the bank receives multiple offers, the one with the fewest contingencies will rise to the top.

The bank may require you to get its own pre-approval for financing and submit it with your offer. You can apply for a traditional mortgage elsewhere, but first check with the REO’s bank, which may offer a below-market interest rate or a low down payment.

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