An REO (Real Estate Owned) is a property that goes back to the mortgage company after the foreclosure auction was unsuccessful. Most foreclosure auctions do not even result in bids due to the lack of equity in the property to payoff the mortgage to the bank.
Foreclosure sales begin with a minimum bid that includes the loan balance and all costs association with the foreclosure process. To bid at a foreclosure auction, you must have a cashier's check for the full amount of your bid. The successful bidder receives the property in "as is" condition, which may include someone actually still living in the property and also any outstanding liens against the property.
Since the mortgage owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. This is when the property “reverts” to the bank and then becomes an REO, or “real estate owned” property.
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs at their discretion. The bank will negotiate with the IRS for the removal of any existing tax liens and pay off any homeowner’s association dues. The purchaser of an REO property receives ownership title and now the opportunity to investigate the property.
A bank owned property dose not automatically mean this it is a great bargain. Before making an offer on an REO property, get comparable prices on other properties in the neighborhood to be sure that you do not pay over market value by getting into any bidding war’s. Also consider the costs of renovation and the time it may take to complete them.
Each bank/lender works a little differently, but they all want to get the best price possible and have no interest in "dumping" their property cheaply. Banks typically have an entire department to manage their REO inventory.
Banks will usually present a "counter-offer" on the first offer that is made for a higher price, but the bank needs to demonstrate to investors, shareholders and auditors that they at least attempted to get the highest price possible. A counter to the counter-offer is always a good idea.
The banks will allow you to get all the inspections you want (at your expense), but they most likely will not agree to do any of the repairs. They probably will provide a Section 1 pest certificate if it is requested in the offer.
Your offer should include an inspection contingency period. This will allow you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.
Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market; however this should not be taken for granted.
Banks are exempt from the California Seller’s Transfer Disclosure Statement (TDS-14). If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.
Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is."
Before making an offer it is a good idea to have your agent contact the the listing agent and ask the following:
- Are there any existing inspection reports?
- What is the anticipated time frame that the bank will accept offer?
- How is the offer delivered?
- Has the bank agreed to do any repairs?
Offers are usually FAXED to the bank. The listing agent needs your originals. There is no formal presentation. Also note that nothing happens evenings and weekends as banks are closed.
Include a pre-qualification or a pre-approval letter and buyer biography with your offer to the listing agent.
