Real Estate Owned Properties

Real Estate Owned (REO) Properties

Real estate owned (REO) properties, also known as foreclosures, are homes or properties that are bank-owned. If you're thinking of buying an REO property, there may be affordable options that are right for you, but the process of buying bank-owned properties is different than that of a traditional purchase. In addition to knowing how much you can comfortably afford and prequalifying for a loan, you’ll want to work with an experienced real estate agent and understand some of what makes buying real estate owned homes different. If you’re ready to shop for real estate owned properties for sale, explore the real estate owned listings from Bank of America. With the right information, and a good source for property listings, it’s easier to find an opportunity that’s right for you. 

Real estate owned or REO is a term used in the United States to describe a class of property owned by a lender - typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction. A foreclosing beneficiary will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the beneficiary will legally repossess the property. This is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as an asset (non-performing asset).

Origin

The term REO originates from the term other real estate owned (OREO), which is used on financial statements to classify real estate property owned by a financial institution but which is not directly related to its business. The important distinction underlying OREO is between lenders versus companies for which real estate management is their primary business. Lenders are primarily in the business of making loans with the intent that nearly all of those loans will be repaid in full with interest. Seizing, managing and reselling real property collateral to recover unpaid loan balances is secondary to lenders' primary line of business.

In balance sheet terms, OREO assets are considered non-earning assets for purposes of regulatory accountin. In the context of national banks in the U.S., the term OREO is legally defined by the Office of the Comptroller of the Currency in regulations promulgated pursuant to 12 U.S.C. § 29.

Process

As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the beneficiary will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker's Price Opinion (BPO) or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide whether to allow a short sale (if requested by the homeowner). If no short sale is requested by the home owner, the beneficiary will continue the foreclosure process. If the beneficiary is unable to sell the property through a short sale or at a foreclosure auction it will now become an REO property.

After a repossession from which the property becomes classified as REO, the beneficiary will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The beneficiary will remove the liens and other debts on the home and try to resell it to the public, either through future auctions, direct marketing through a real estate broker, or by itself. The asset manager may also try to contact REO realtors that specialize in certain ZIP codes to help sell this bank owned property. Real estate investors will often purchase these properties because of discounts offered to compensate for the condition of the property.

Many larger banks and government institutions have REO/asset management departments that field bids and offers, oversee up keep, and handle sales. Some REO properties on the open market will be listed in MLS by the broker who performed the BPO. In the contraction that resulted from the S&L crisis, a common problem in many areas involved the listing broker "pocket listing" the transaction and not putting it out on the open market. Agents who have a pocket listing will put the listing on the MLS but will sometimes not field legitimate offers in the hopes of selling it themselves, quite often contrary to the beneficiaries wishes. To combat this, REO exchanges and government foreclosure outlets have been developed to overcome this problem.

Property preservation

Bank REO properties are generally in poor condition and need repairs and maintenance, both to satisfy property upkeep laws and to preserve and prepare the property for sale. Maintenance is generally the responsibility of the mortgage servicer[3][4] and is often in turn provided by a specialized property preservation company. These property preservation services include: securing a property (changing locks, boarding up), debris removal, property maintenance (winterizing, cutting grass, repairing or tarping roof leaks), and rehabilitation.[3][5]

In addition to preventing damage to the property, securing a property is used to prevent or discourage re-entry by former occupants or by squatters, which can both damage the property and require legal proceedings to remove, further complicating a sale. Swimming pools must also be secured to prevent deaths or injuries from drowning and falls.

Bulk real estate owned

Bulk REO or bulk real estate owned, from a real estate investor’s point of view, is like investing on wholesale real estate properties. On the other hand, banks or lenders sell or open their assets in group for auction at a very low price compared to their market value. One benefit of investing on REO's in bulk is that a buyer can get good discounts upon purchasing them. However, the downside would be the incurred expenses from the closing amounts of the properties that the investor needs to pay.

For instance, a real estate investor purchased four REOs for $600,000 by borrowing an amount of $500,000 and paying $100,000 as down payment. Each property costs $150,000 and the down payment is allocated equally among them at $25,000. The remaining balance for each property will then be $125,000 which is financed through blanket loan or $500,000. Each property will still have a release clause of $125,000 so that it can still be sold separately without affecting the blanket loan. Thus, in case one has sold a property for $300,000, one only needs to pay off the release amount of $125,000 taking home the profit of $175,000.

Most bulk REOs have these common characteristics:

  • Marginal location - low population rate or poor commercial activities;
  • Low or no market demand
  • Not qualified for conventional financing

Typically, bulk REOs are found in low to non-residential areas with low to moderate income residents. Most are abandoned, have no appeal and only incur cost to the lender or bank. Generally, these properties sell for 40 to 60 percent lower than the actual market value.

REO stands for Real Estate Owned properties, which get reclaimed by the bank or government agency which financed their mortgage after failing to sell at a real estate auction. Generally, REO properties get sold on the open real estate market using a real estate agent or in bulk sales to investors. REO properties generally get sold at a discounted price when compared to comparable properties.

History

Foreclosures in the United States date back to the early 1930s. Following the stock market crash in the fall of 1929, unemployment rose and caused the housing and bank markets to fall. At the same time, a sandstorm- and drought-filled season caused farmers' businesses to fold. By 1933, almost 0.73 percent of the homes in the United States became bank REO properties with about a thousand occurring daily. The nation's first REO auctions, referred to as “penny auctions,” forced profit-hungry banks to purge unsold properties, which became liabilities.

Features

An REO property can be any age or style, in virtually any neighborhood. The majority of REO foreclosed properties require work to rehabilitate or repair problems. Typical REO property issues include damaged walls, missing fixtures or appliances and faulty mechanical components. A former property owner's unwilling and unhappy departure coupled with a long period of vacancy is a recipe for property damage.

Benefits

Eager banks may offer attractive financing programs to buyers to unload REO properties. Some REO loan incentives include zero percent or a reduced down payment when compared with conventional loans, lower interest rates, less stringent credit criteria, faster approval and financing for homes which other lenders may not approve.

Negotiation

Vacant REO homes are a profit drain on bank owners, resulting in an urgency for sales. When a buyer makes an offer to purchase a REO home, it can seem less personal and less emotional than a transaction with a traditional homeowner-seller. In an REO home offer, the bank representative simply considers the bank's bottom line and generally makes a fast decision, which can result in a smooth and quick closing. 

Warning

Banks typically sell REO properties "as-is." As a buyer, a professional property inspection allows you to make an educated offer for purchase considering the costs involved to repair any existing defects. A buyer may offer less or request the bank make a repair in the instance of major home systems such as electrical, plumbing and mechanics, and the bank may agree to facilitate a sale.

Buying Bank Owned Properties (REO)

by Walt Harvey
Walt and Arla Harvey are Realtors in Honolulu, Hawaii.

So you’d like to buy a bank owned property?

You’ve watched the late-night infomercials and you’re ready to do the bank “a favor” and take a problem off their hands. Plus, you expect to make "a killing" in the process. Sounds great and it might just happen, but first you should take a look at some facts and get prepared.

REO vs. Foreclosure

An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.

Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property.

Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property.

REO Properties For Sale

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. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.

A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value. It’s an old myth that “foreclosures” are a bargain.

How Banks Sell REO's

Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory.

Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate toinvestors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.

Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."

Property Condition

Banks always want to sell a property in "as is" condition. Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.

Your offer should include an inspection contingency period that allows 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-negotiateto save the transaction instead of putting the property back on the market, but don’t take it for granted.

Banks do not want to see a lot of proprietary disclosures; they 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."

Making an Offer

Before making an offer, have your agent contact the the listing agent and ask the following:

  • Are there any inspection reports?
  • What work has the bank agreed to?
  • Is there a special "as is" form?
  • How long does it take the bank to accept an offer?
  • How does your agent deliver the offer?

Offers are usually FAXED to the bank. The listing agent needs your originals. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed)

Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter and buyer biography. Make your offer easy to accept.

Hopefully these tips will manage our expectations. Remember that REO's sell at pretty close to full market value and are not the deals presented on late night television.

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