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Whether you are a homeowner, investor or agent in training you need to know the language of the Real Estate industry and all of the terminologies that come with it. A Real Estate Owned Property or REO is not the sappy pop band you remember from the 1980's. REO's are typically owned by a lender or owner such as a bank, government agency or loan insurer after an unsuccessful attempt at foreclosure proceedings and an auction sale. These properties on the surface seem distressed since they might be damaged and have reverted back to the owner because the bids were lower than either the amount of the loan due or the value of the home. That being said there is a great upside to buying these properties at the present time. Let's examine what goes into an REO sale.
Although not every REO home is a great bargain, there are certainly deals to be had in this flooded buyers market. Since the bank or lender has put a lot of time, paperwork and money in to making repairs, dealing with other lien holders and tax issues they are looking to get some return on their already failed investment. Still, the buyer who has knowledge on their side can negotiate for properties because ultimately the bank has already lost money on the original foreclosed home, gained nothing at auction and wants to recoup something financially. Often once you make an offer to purchase, the bank will make a counter-offer. Since you can always expect that counter offer to be higher and for more than you will want to pay be sure to prepare ahead of time to counter the counter-offer. Banks and other sellers of REO homes are in a tough spot since on one hand the want to demonstrate that they received some kind of return closer to full market value, they also want to move these properties and not hold on to them any longer as maintenance is costly.
Most sellers of REO's will want you to buy the property in "As-Is" condition. The vast majority of these properties were abandoned in the foreclosure process. In some cases had extensive damage or neglect and had consequently extensive work done to make to bring them up to code and make them livable again. Repairs and maintenance are often overseen by the lender or specialty "Safeguard" companies or "Property Preservation" companies that have sprung up as a new cottage industry since the RE bubble crashed. Depending on the quality of the property and the seller's prerogative you can request additional improvements or repairs based on the condition of the home, if they are not already being offered. You can have your own inspector come in at your cost (see our recent guide to hiring a Home Inspector ) and match up reports and contest the findings if needed. A home with extensive damage (perhaps from abandonment) or major red flags and additional work needed is a negotiating opportunity for the savvy and aggressive buyer.
Before making an offer you should consider the following key points: a) Are inspection reports available and do they complete a current assessment to your satisfaction? b) Has the bank agreed to any additional work pending a re-sale. c) Are there additional documents requiring the property to be sold "As-Is" attached. d) What are the terms and conditions attached to the sale of the property? e) How long can you expect to have your offer accepted, denied or a counter-offer made. As with everything read everything carefully and make notes where you have discrepancies and red flags to generate key questions.
Remember banks and agencies like HUD operate strictly to market variables and hours so they will likely only be available during professional hours. The HUD website has some excellent resources for both buyers and sellers of REO's relative to their own interest in selling the vast amount of REO owned, managed and sold by the government.