Ten Questions Buyers Might Ask before Buying Bank-Owned Property
Introduction
There may be incredible bargains on properties that have been foreclosed and
are now owned by lenders. There may also be pitfalls. This brochure may help
you avoid the potential problems and make your purchase go well. Here are ten
questions to get you off to the right start:
1. What is REO and what's the advantage to buying it?
Once a property has been foreclosed and has been taken back by the lender, the
property is commonly called an "REO" or "real estate owned" by the foreclosing lender.
In most cases, although not all, the REO is now owned by a bank, finance investment
group, or other financial institution. The lender may not wish to continue owning the
property, as it may be costly and may tie up the lender's assets. REO lenders may be
strongly motivated to sell, and may offer bargain prices well below those of comparable
properties.
2. Where can I find out about these properties?
REO property may be marketed through real estate agents, through traditional multiple
listing services, or through real estate auctions, to name a few sources.
3. Is the paperwork when making an offer on REO different from other
Except for purchasing at a real estate auction, a standard-form purchase agreement
may be the same as if you were purchasing property that is not REO. Auctions may
use special contracts, and due to the complexities of buying at REO auctions, these
types of sales are not covered in this brochure.
purchases?
Once your offer is submitted to an REO lender, you may receive an addendum to sign
as part of the contract. This REO addendum may specify additional terms and
conditions between buyer and seller. These may include an "as is" and "where is"
clause. The addendum may also state that there are no written, oral, or implied
warranties. If, however, an REO lender knows of something that is wrong with the
property, or is in possession of any inspection reports, they may be required to disclose
this. The REO lender's addendum may also contain a provision that if the buyer does
not complete the sale by the agreed date, a "per diem" may be charged to the buyer.
The REO lender may also spell out what closing costs they will pay, and which ones the
buyer will be expected to cover.
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Kobi Grant Worldwide Signature, Inc. 2653 Tierra Grande Cir. Sacramento, CA 95827
Aside from the REO addendum, the REO paperwork may differ from a traditional sale in
that REO lenders are exempt from certain disclosure requirements, such as a Transfer
Disclosure Statement (TDS). This disclosure indicates what a seller knows about the
property's condition. The concept of the TDS is simple: an owner may have a "history"
with the property and may be aware of problems or "red flags" concerning the property.
In a typical REO transaction, however, the former owner has lost the property through
foreclosure and is now out of the picture.
4. How can I discover any potential problems with REO property I want to
A buyer is encouraged to thoroughly check all aspects of a property, and to hire third
party inspection services to inspect the property and provide a written report. These
inspections may include a Standard Structural Pest Control Report (commonly referred
to as a termite report), a Home Inspection or Contractor's Report, and other inspections
such as roof, septic, pool, or well, to name a few. Review these reports carefully. If
further inspections are recommended, consider the value of having additional
inspections and estimates so you may learn as much as possible about the property
and other issues concerning the property.
buy?
Buyers are cautioned that the REO lender may have little or no knowledge of the
physical condition of the property. The lender also may not know of external or
economic issues which may impact the property's value or desirability. The REO lender
may have owned the property for a very brief time since completing the foreclosure
process.
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5. I've heard that REO properties may be in bad condition. Why is that?
The former occupant of the property, particularly if that occupant lost ownership or was
evicted in the foreclosure, may have skipped routine maintenance items, ignored
needed repairs, stripped appliances or fixtures, or deliberately damaged the property.
Although the REO lender may subsequently have done repairs to make the property
marketable, it is possible that unknown or hidden problems may surface later. It's
recommended that you have all the utilities turned on during your inspections, because
this may give you and your inspectors the opportunity to spot leaks, electrical
malfunctions, and the like. REO lenders may not offer home warranties or guarantee
the condition of the property, so know what you are buying.
6. How much of a bargain can I get if I buy an REO property?
The answer to your question depends on many factors. You may ask your REALTOR®
for information about other comparable properties that are currently available for sale
and those that have recently been sold. Compare what you want to buy with those
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Kobi Grant Worldwide Signature, Inc. 2653 Tierra Grande Cir. Sacramento, CA 95827
other properties that are comparable in size, area, and style. You may find that you can
purchase an REO for substantially less than other properties if you are willing to
complete the transaction according to the timeline and specifics that the REO lender
desires.
8. Is it true that some REO sellers don't always reply promptly when I've
That depends on which lender owns the REO. The REO lender may have a
department set up to respond to offers, may have outsourced this task to an asset
manager who is not a part of the lender's firm, or may have some other arrangement. If
there are multiple offers on a property this may also cause delays. The listing agent
marketing the property may work with your real estate agent to communicate the need
to reply promptly, although it may ultimately be the REO seller's decision.
made an offer?
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7. Will the REO lender make a new loan to me?
Some REO lenders are anxious to be rid of a property, and may offer financing if the
buyer has, among other things, a satisfactory down payment and credit score. Some
REO lenders may want to offer new financing as part of their business plan. Of course,
there are some REO lenders that may not want to repeat the foreclosure drill, so you
may make a better bargain if you can offer all cash to them. Your real estate agent may
be able to help determine what an REO lender may prefer.
If you are aware that a property has been recently foreclosed, the REO lender may take
a few weeks to put the property on the market. This may be due to the time needed to
acquire an appraisal, get opinions of value from local real estate agents, vacate the
occupants, and do the necessary repairs to ready the property for sale. The REO lender
may not respond to any offers until this process is complete, even if a real estate agent
has already been designated to handle the listing.
Some buyers may continue shopping for another property while they wait to hear
whether or not their offer is accepted by an REO lender. In certain circumstances,
buyers may specify that until their offer is accepted, they have the right to make other
offers and "take a walk" if they find something else.
9. Can the former owner come back and make a claim against my REO
purchase?
The lender who initially forecloses and takes back the property may have this risk. This
foreclosing lender may wait a period of time before offering the property for sale as
REO to enable subsequent buyers to obtain title insurance. Once this REO lender
re-sells the property, a "bona fide purchaser for value and without notice" may be
protected against a former owner's potential claim, and may also be able to obtain title
insurance to cover against such risks.
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Kobi Grant Worldwide Signature, Inc. 2653 Tierra Grande Cir. Sacramento, CA 95827
Conclusion
You may find you have a need for pricing data, inspection guidance, and
negotiating assistance in order to make a wise purchase of foreclosed property.
You may find your greatest ally in buying REO is your local REALTOR®.
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