Buying Foreclosures/REO’s

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What is an REO?

foreclosure_sign“REO” is short for Real Estate Owned. These are homes which have been foreclosed upon and are now held by the bank or mortgage company. This is not the same as a property up for foreclosure auction.

When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. The buyer must also be willing to pay with cash in hand. To top everything off, you’ll receive the property 100% as is. That possibly will include standing liens and even current residents that may require eviction.

A bank-owned property, by contrast, is a much neater and attractive deal. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The lender will see to the elimination of tax liens, evict occupants if needed and generally arrange for the issuance of a title insurance policy to the buyer at closing.

Take notice that REOs may be exempt from typical disclosure requirements. For example, in Nevada, it is optional for foreclosures to have a Property Disclosure Statement, a document that usually requires sellers to disclose any defects of which they are knowledgeable. By hiring Kauai Board of REALTORS®, you can rest assured knowing all parties are fulfilling Hawaii state disclosure requirements.

Are REO properties a bargain in Kauai County?

It’s commonly presumed that any foreclosure must be a bargain and a chance for guaranteed profit. This isn’t necessarily the case. You have to be very careful about buying a REO if your intent is tomortgage_risk_01 make money off of it. While it’s true that the bank is often anxious to sell it promptly, they are also motivated to get as much as they can for it.

Look closely at the listing and sales prices of similar homes in the neighborhood when making an offer on an REO. And factor in any repairs or upgrades necessary to prepare the house for resale or moving in. The bargains with money making potential exist, and many people do very well flipping foreclosures. Still there are also many REOs that are not good buys and may lose money.

Prepared to make an offer?

Most lenders have staff dedicated to REO that you’ll work with when buying REO property from them. Usually the REO department will use a listing agent to get their REO properties listed on the local MLS.

Prior to making your offer, you’ll want to contact either the listing agent or REO department at the bank and learn as much as you can about what they know about the condition of the property and what their process is for accepting offers. Since banks typically sell REO properties “as is”, it may be in your best interest to include an inspection contingency in your offer that gives you time to check for unknown damage and withdraw the offer if you find it. If, as a buyer, you can provide documentation showing your ability to secure financing, such as a pre-approval letter from a lender, your offer will be more attractive and likely be accepted. (This goes for any real estate offer.)

After you’ve made your offer, it’s customary for the bank to respond with a counter offer. At this point it will be your choice whether to accept their counter, or submit another counter offer. Your deal could be settled in one day, but that’s usually not the case. Since offers and counter offers usually allow a day or more for the other party to respond (and employees at a bank don’t work nights or weekends) you could be looking at a week or longer.