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Are Lender-Owned Properties (REOs) Smart Options for Buyers?

Posted By: Alan Donald In: Market Opportunities
Date: Wed, Jul 14th 2010 8:17 am

Are Lender-Owned Properties (REOs) Smart Options for Buyers?

By Alan Donald, BuyHomesInCharleston.com

REOsIt seems that one out of three properties in the Charleston Metro Area is either a SHORT SALE or an REO (*)

(*) An REO (Real Estate Owned) is a lender-owned property - a property that has already been through foreclosure and is being offered for sale directly by the lender after taking control of it. 

Normally these properties are offered at very attractive list prices, so many of those properties offer terrific buying opportunities. But, like the old saying says: "Don't judge a book by its cover", there may also be challenges associated with buying REOs. Here is a list of potential pro's and con's of buying REOs:

PRO'S

  • Price... Normally you can buy REOs at a substantial discount comparing to retail prices.
  • Motivation... Sellers (usually an asset manager for a lender) are motivated to move the property quickly (banks are not in the property management business). So getting an answer to your offer will normally happen very fast (compared to short sales, which can take weeks, even months to negotiate). Also, it may be easier to get some seller concessions like closing costs.
  • Reduced Competition... Not all house-hunters (especially those who are not being helped by a Realtor) may be aware of REO properties, so buyers may face less competition.

CON'S

  • Condition... Many REOs have been vacant with no utilities connected for long periods of time. This may result in noticeable deterioration of the condition of the house, and may result in problems such as leaks, termite infestation, mold or other problems associated with lack of maintenance. And ALL REOs are offered "As-Is", "Where-Is". Buyers can still conduct their inspections, but the seller is not willing to pay to fix whatever faults they find. Having said this, in my own experience I have found that if the problems are essential and material in nature (i.e. roof leak, termites, structural, safety), sellers will normally cave in and perform these repairs, because they know that if the current buyer walks away, they will have to disclose these facts to the next buyer, and in the end it will end up costing them more.
  • Paperwork & Legalese... Since REOs are administered by asset managers, they want to fully cover their behind when it comes to reducing liability for the bank and limiting future legal recourse for the buyer. Most sellers will make buyers sign a multitude of addenda, disclosures and disclaimers that are very one-sided to protect the seller. And there is no option to negotiate these terms. Take it or leave it. 
  • Title Issues... Since these properties were recently acquired via foreclosure, there may be issues with providing marketable title that are still in process. I experienced recently a 2-month delay with an REO closing due to the fact that the seller was not able to provide marketable title on time!
  • Competition from Savvy Buyers... Investors and home buyers who are experienced or who are being well advised are normally on the prowl, actively looking for these bargain opportunities. The moment a lender places a good property on the market at an aggressive price, these buyers will place offers. It is not uncommon to be in a multiple-contract situation with well-priced properties. Some sellers are requiring that the property to be on the market for at least ten days before they look at any offers, to allow for multiple offers to come in and create a "silent auction" scenario between interested buyers that may push the price up. 

So, are REOs smart options for buyers? It depends: If you are an experienced buyer and perform thorough due diligence, or hire an experienced Realtor to represent you in the transaction, REOs represent some of the best current market opportunities!

Alan Donald is Team Leader for BuyHomesInCharleston.com. Call Alan to speak in confidence about your specific hardship situation. Our team specializes in short sales, foreclosures and lender-owned properties. We will give you FREE advice, share our experience and talk to you about many options available to help you minimize negative impact on your credit.