Buying Foreclosure REO—the Ups and Downs of Doing That

REO stands for Real Estate Owned by Lender, and buying a foreclosure property owned by the bank or financial lender comes with a wide range of ups and downs. It presents a property that has been taken back by the lender through a foreclosure, and now, the title is under the lender’s name.

The property can be either managed by the lender or one of the agents of the concerned bank. Buying a foreclosure REO property offers many advantages and disadvantages for buyers. It can be a good choice given the circumstances, but it can also turn into a financial nightmare.

These properties are generally considered to be distressed properties, and can usually be purchased for less-than-market rate for their area and size. However, these REO properties often also come with a speckled maintenance history and are often in rough shape. Thus, while they can usually be purchased for a lower price than a home of that size and area would generally command, the concurrent maintenance and property condition might be in such a state that you do not want to become involved with the property.

It is advisable to have an REO property carefully inspected and to negotiate carefully to have it put in the condition you expect before purchasing it. It is very possible to get a great deal when buying an REO property, but the maxim of “caveat emptor” or buyer beware should always be kept in mind when dealing with these properties.

Buying foreclosure REO from a bank or mortgage company can be a good choice for you or depending on the particular circumstances, can turn out to be a nightmare. REO stands for “real estate owned” and represents a property that the lender has taken back through foreclosure and which is now titled in the lender’s name and managed by the bank or one of its agents.

When buying a foreclosed home owned by a lender, the bank or lender is highly focused on selling off the property. There will be lengthy negotiations on the price, down payment, closings costs, escrow accounts and more. However, since the bank is not trying to make a profit but only seeks to recover the loan amount, buyers can enjoy a fair deal for the house they want to invest in.

Buying a Foreclosure REO

The most important thing to note about buying a foreclosed home is the fact that you are investing in a distressed property. These properties can be typically purchased at a price lower than the market rate for properties of the same size and specifications. The title is always clear and the buyer will not be obligated to obtain any liens, taxes, or mortgage of the previous owners.

The designated period of due diligence and contingency allows the buyer to sort out the mortgage financing needs and undertake home inspections. The greatest advantage is that the house is vacant and if the buyer has the funding, he/she can move in quickly.

These properties are typically listed on the MLS portal, and the buyer does not have to worry about hiring a real estate agent. The commission for the realtor is paid by the bank or lender. Moreover, REO sales tend to close within a standard escrow time period.

Buyers are often intrigued and encouraged by the idea of scooping up a property at below market value rates, and being able to move in quickly. With sellers and home owners, the negotiations can draw out and become overly lengthy. But negotiating with a bank that wants to sell off a distressed property as quickly as possible tends to be less overwhelming.

Buyers are also looking how to buy a foreclosure home at cheaper rates, and these properties are typically sold at less than 5% of their market value. These properties come with a wide range of discounts, depending on the state and region. In certain situations, buyers can also reap the benefits of saving up on additional expenses, such as lesser down payments, reduced interest rates and more. In certain cases, buyers don’t have to make appraisal fees and can also avoid certain closing expenses.

What is the Downside?

Buying a foreclosure property owned by the bank comes with many downsides, which often go neglected given the cheaper cost and other discounts. However, buyers need to be vigilant in performing their due diligence and home inspection in order to avoid a financial nightmare.

When buying a foreclosed home, it is important to keep in mind that you are investing in a distressed property. Typically, REO properties come with a wide range of management and maintenance issues. Since they are usually vacant, their upkeep and maintenance has been neglected, which can aggravate certain repair needs and structural defects.

Buying a foreclosed home comes with the lure of the cheaper bargain as you are purchasing a property for a significantly lower price than its actual market value, size and area. But when you compare the costs that you will incur to restore the state and condition the property might be, you might want to reconsider buying a foreclosure REO.

Typically, foreclosure properties are in a bad state due to lack of maintenance and tend to have a wide range of problems. However, homeowners who are contractors or interested in renovating a cheaper property to suit their preferences might be interested in buying a foreclosed home. Negotiations can be a slippery slope when you are dealing with a bank, lender or financial institution.

In the case of sellers and home owners, home inspection reports can be used as a powerful negotiation tool but when dealing with banks, they want to sell of the property as-is. So, banks will not agree to provide any of the repairs or take care of the maintenance issues. The buyer will have to fund the homeownership cost and the cost of repairing the property and restoring it to its former glory.

When dealing with banks and financial institutes, the paperwork also tends to get lengthy. You will need a real estate agent and a real estate attorney to walk you through the overwhelming legalities and paperwork requirements. This also means that you will be incurring costs of hiring an attorney and other professionals.

Moreover, if the foreclosed property requires major repairs and renovations, you will also have to obtain the required permits to undertake the repairs and renovations. Another major drawback of buying a foreclosed home is that banks are not liable to provide disclosures about the history and condition of the property.

This can prove to be a major disadvantage for first-time buyers. It can quickly turn into a financial nightmare if the house has significant defects with the water or heating systems, electric wiring or even a mold problem.

As seasoned real estate experts, we strongly advise buyers buying a foreclosure REO property to undertake a diligent and careful inspection. They must also be focused on undertaking careful negotiations with the lender or bank with regards to the condition of the property. It’s not difficult to get a good deal while buying a foreclosed REO home, however, buyers should be aware of the challenge they are undertaking by investing in a distressed property.

Outline:

Foreclosure REO properties are distressed properties that are owned by the bank or financial lender after the original owner failed to pay back the mortgage or defaulted on the loan.
Albeit cheaper than their market value, these properties are termed as distressed as they tend to have a wide range of challenges, and repair and maintenance needs.

http://en.wikipedia.org/wiki/Foreclosure