Sometimes the initials in an acronym are helpful, but ‘REO’ (short for Real Estate Owned) isn’t one of them. After all, isn’t all real estate owned by somebody? What the headline writers are talking about is a property, usually a repossessed home, owned by a lender. That’s usually a bank, government agency, or government loan guarantor, which typically comes into possession after a failed sale at a foreclosure auction.
Now let’s assume you’ve watched the late-night infomercials (Rich Dad Poor Dad, anyone?) and you’re pumped to buy Kansas City REO to begin your climb to real estate fame and fortune. “Easy as pie,” the commercials promise! "Opportunity isn't just knocking -- it's pounding the door down!" Such enthusiasm is admirable – and as much as I’d like to see you collect on the promise – let’s slow down a bit and take a look at the nuts and bolts of the actual process.
REO properties can indeed be great deals because they can be bought at or below market value. Lenders want to get their money back quickly and they often reduce the asking price significantly to encourage offers. “In 30 years, I’ve never seen a market like this,” says Denny Grimes, an agent in Fort Myers, FL, quoted by web source moneytalknews.com. “Thanks to a glut of foreclosed properties, here it’s possible to buy a house for $70,000 that three years ago might have sold in one day for $250,000.”
While you could indeed walk away with a terrific deal from a foreclosed purchase, you will be wise to also consider the potential pitfalls an REO purchase can involve. First and most obviously, when you buy a foreclosure, you buy a property “as is”. Banks generally make it clear that they do not have to disclose any problems with the home, even major problems like mold and foundation issues. The previous owners may also have saved money by making major changes to the home without getting proper permits or hiring licensed contractors.
Ted Mackel of homebuysblog.com has found that “Foreclosed homes are in typically poor condition. The prior owners could not afford to make payments and if they were short on money, then regular maintenance and upkeep was often neglected.” Compounding the problem, if you are trying to buy a home with an FHA, VA or other loan, banks sometimes refuse to issue loans on previously foreclosed properties. How’s that for irony?
Another potential pitfall is that while banks should want to unload REOs as quickly as possible, and sometimes even offer additional incentives to agents or buyers for a quick close, in reality, banks sometimes drag their feet. The longest delay you’ll likely come across is the bank acknowledging your offer. Once the deal is settled closing can take place fairly quickly.
Despite these roadblocks, the competition can also be stiff. Even though you’re not hearing it in the news, homes are selling, and bargain priced homes often get multiple offers. A December article says that REO owner-occupant property buyers are becoming harder to find. New Vista Asset Management has published the results of a three-year study on buyers of foreclosed homes surveying 18 counties hit hardest by the mortgage meltdown. The company says the percentage of REO homes sold to owner-occupant buyers has decreased in almost every market. In most markets, investors have become the new primary buyers for REO properties, and with their all-cash offers and swift closes, can often be more appealing to a bank than a traditional individual buyer.
Not quite the picture painted by those TV commercials, is it? Nonetheless, there are great deals out there, and if you want lay claim to one yourself, by all means, go for it! The course of buying an REO property should be doable for anyone who is determined, patient, and prepared. And of course – importantly – someone aided by expert help: an agent experienced in handling Kansas City REO purchases. That’s why I’m always standing by to discuss your ideas and questions!