5 Things to Know About REOs

Real Estate Owned Homes are a Great Deal

While an REO can be a great opportunity, it’s still a big risk.

Banks are on pace to sell around 500,000 real estate owned homes, or REOs, this year alone, a great opportunity for a homebuyer looking to score a great deal in the struggle housing market. Most bargains will be around 5-10 percent below market value, but some could be as much as 30% below.

Still, buying a foreclosed home, and especially one that’s gone as long without a buyer as an REO, is a process not for the faint of heart. But if you have a taste for adventure and bargain-hunting, here are 5 things you should know before buying an REO.

But first, the basics.

An REO is a foreclosed home that made it through public auction and was purchased by the lender. Purchasing an REO can net some good bargains, but competition for REOs can be fierce, and rather than dealing with a seller, you’re dealing with a company.

1. Finding the right REO home can be difficult.

The good ones get bought up quickly, and you need to move fast when you find the one you like. And because the entire process of buying an REO, from finding the right one to closing the deal, can be complicated, it can be hard to beat out more experienced investors.

Takeaway: Hire a real estate agent with experience in the REO market. They’ll help you find the right house, and make the process go more smoothly and quickly.

2. REO houses are usually in less-than-optimal condition.

From stained carpets to holes in the walls to missing appliances, REOs are often neglected by their owners once foreclosed on, and not repaired by the bank. Many REOs have also sat shuttered for six months or more, opening up all kinds of opportunities for mold and structural damage.

Takeaway: Always give an REO a close inspection, and figure repair costs into your negotiations with the bank.

3. The bank will usually do nothing to fix up the property.

REOs are generally sold as-is, and banks won’t make requested repairs like a private seller might. This can complicate securing financing for the purchase, as some types of loans, like VA or FHA loans, won’t be granted for a home that isn’t habitable. So if the previous resident ran off with the kitchen, you’re out of luck.

Takeaway: Do your homework on what kind of loan you’ll need before you look. Many REOs will prequalify for VA or FHA loans, but not all.

4. You may have to make your offer completely blind.

Banks or the bank’s listing agent often will not disclose anything about the house, including how many other offers there are or their amount. You also won’t get disclosure on inspections or other reports, so you may have do some reading up at the building permit office and get an inspection done.

Takeaway: Your first offer is critical, so go with the highest amount you’re comfortable with, and be ready to negotiate from there. Speed is essential, especially if you’re using a VA or FHA loan, which banks will try to avoid because they take more work.

5. There are a lot of REO homes to choose from right now.

Even though banks will be tough negotiators, they’re still trying to move homes off their balance sheets as quickly as they can, so usually they’ll try to salvage a deal. REOs carry a greater risk for the buyer than other homes, and should be treated with caution. Make sure you have a clause in your offer that allow you time to inspect the home and adjust your offer accordingly before the closing deadline.

Takeaway: If the bank won’t negotiate to include the terms you’re comfortable with, walk away. There are plenty more houses to look at, and an REO is too risky a venture to take if you aren’t totally satisfied.

Photo courtesy of Jeff Turner via Flickr’s Creative Commons.