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Real Estate Owned (REO) is a term used to describe real estate acquired by lenders via a foreclosure or via a deed from the owner in lieu of a foreclosure. If the lender acquired the REO property via a foreclosure, the property has probably undergone an unsuccessful foreclosure auction. Since what is owed to the lender is often considerably more than what a property is worth, many foreclosure auctions do not result in a successful sale.
In some areas of the country, lenders handle the sale of their own REO’s; however, the trend is for lenders to use third party servicing companies that specialize in working with REO’s. These servicing companies work directly with real estate companies such as The Stott Team to sell their REO’s. When a housing market is depressed, REO’s become far more prevalent. The Stott Team is very involved in this facet of real estate; we belong to various REO organizations, attend periodic Mainland REO meetings/conventions and participate in Internet discussion groups with other REO agents. This article is based upon our experience representing both buyers and sellers; it is designed for absentee owners that might be considering purchasing an REO property either in Hawaii or on the Mainland. Some advantages follow:
1. The primary advantage of working with REO’s is that it often enables a buyer to purchase real estate at a discount; i.e., under market value; however, this is not always the case. Moreover, purchasing an REO may involve costly repairs; refer to item #4 in the next section.
2. REO’s are normally listed with real estate agents and in the local or area Multiple Listing Service (MLS). They can usually be found on various real estate websites. REO’s are normally vacant and should be thoroughly inspected prior to submitting a purchase contract.
3. In most cases, all liens will be removed with back taxes handled by the lender; i.e., the buyer normally gets the property free of liens. This is not always the case, though; refer to items #7 and #8 in the next section.
4. While foreclosure properties are often in deplorable condition, REO’s are usually restored by the lender to a minimum sellable condition. The listing company will usually be provided a budget for removal of trash, etc.
5. The lender that owns the property will often provide an allowance for specified repairs and/or buyer closing costs. The lender may also provide preferred financing.
Some Recommendations:
1. If you do not have experience working with REO properties, we recommend you work with a real estate agent that does have such a background. Prior to submitting an offer, your real estate agent should contact the listing agent to find out if there is anything unusual in the seller’s or servicing company’s paperwork and what normal seller expenses they do not cover such as conducting a property survey, conducting a termite inspection, treating the property for termites, etc. These expenses may be required by your mortgage company and, therefore, will become buyer costs if not paid for by the seller. So, you may want your offer to include a credit to cover them.
2. Many servicing companies charge a per diem such as $100/day if you cannot close as scheduled. Have your agent find this out in their call to the listing agent and if it applies, provide an ample cushion of time in selecting a closing date.
3. Servicing companies work in a number of different states. As a result, their paperwork will often include standard items or boilerplate that may not be applicable in your state. If you’re in an escrow state, the servicing company will usually designate the escrow company and/or the actual escrow agent to be used. The servicing company’s paperwork (contract addenda) will almost always be heavily weighted in their favor. There is usually a statement that if there is any conflict between their paperwork and the purchase contract, their paperwork has precedence. There is also usually a statement in their paperwork that the property was acquired via a foreclosure and the seller will not provide a property disclosure. The servicing company’s paperwork varies in length and complexity from company to company. It is very important to read it very carefully so you fully understand all the terms.
4. Most owners of homes that go into foreclosure have been struggling financially, which usually means the property has not received needed repairs or general maintenance for some period of time. The seller may agree to provide a buyer credit to cover some repairs; however, normally they will not make such repairs themselves unless it is to correct a safety hazard. Plan on having to make your own renovations and/or repairs. Have a contractor provide you cost estimates and then budget those costs into your offering price or credit.
5. The servicing companies have asset managers that work with listing agents. The amount of leeway given to an asset manager will vary considerably depending on the lender, the servicing company and the experience of the asset manager. Most communications between a listing agent and the asset manager are now done online; e.g., when an offer is received, the listing agent extracts key information from the offer and provides it to the servicing company via a form on the servicing company’s website. In some cases, a counter offer will be provided within hours while in other cases it may take several days and include a requirement to provide the actual offer to the servicing company and/or lender. So, be patient and anticipate that you may not have a response to your offer for some period of time.
6. The first counter offer from the seller is not necessarily their final answer. The servicing company may need to demonstrate to the seller that they are attempting to obtain a price within a specified range of the list price. Don’t be hesitant to counter the seller’s counter offer. You may go back and forth with counter offers several times before reaching a price and terms that are acceptable to both parties. Once a contract price has been established, it usually is very difficult to get the servicing company to agree to any additional expenses or credits. That’s why it is important to have the property inspected prior to submitting an offer.
7. Have the title company conduct an early title search for liens and outstanding taxes. One problem we’re experiencing these days, is service companies are listing properties before they have established clear title with ownership by the lender. This is a particular problem with non-judicial foreclosures.
8. Different states and areas of the country may have special laws or ordinances that apply to the sale of REO’s which is another reason for using an experienced REO agent. For example, Oahu has a law that states the buyer is responsible for paying up to six months of outstanding maintenance fees owed by the foreclosed owner (up to a maximum of $1,800). Therefore, it you are purchasing a condominium REO on Oahu, it is important that your offer cover this cost and make it a lender responsibility.
9. In many cases, a foreclosed owner has unsuccessfully attempted a short sale prior to the foreclosure. Then, the property went into foreclosure with an unsuccessful foreclosure sale by the lender. On Oahu, we are finding that many of the REO selling prices are considerably less than the short sale listing price. Have your real estate agent research the MLS history of any REO property you are considering.
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Buying REO Properties
Click here to view the entire newsletter.
Real Estate Owned (REO) is a term used to describe real estate acquired by lenders via a foreclosure or via a deed from the owner in lieu of a foreclosure. If the lender acquired the REO property via a foreclosure, the property has probably undergone an unsuccessful foreclosure auction. Since what is owed to the lender is often considerably more than what a property is worth, many foreclosure auctions do not result in a successful sale.
In some areas of the country, lenders handle the sale of their own REO’s; however, the trend is for lenders to use third party servicing companies that specialize in working with REO’s. These servicing companies work directly with real estate companies such as The Stott Team to sell their REO’s. When a housing market is depressed, REO’s become far more prevalent. The Stott Team is very involved in this facet of real estate; we belong to various REO organizations, attend periodic Mainland REO meetings/conventions and participate in Internet discussion groups with other REO agents. This article is based upon our experience representing both buyers and sellers; it is designed for absentee owners that might be considering purchasing an REO property either in Hawaii or on the Mainland. Some advantages follow:
1. The primary advantage of working with REO’s is that it often enables a buyer to purchase real estate at a discount; i.e., under market value; however, this is not always the case. Moreover, purchasing an REO may involve costly repairs; refer to item #4 in the next section.
2. REO’s are normally listed with real estate agents and in the local or area Multiple Listing Service (MLS). They can usually be found on various real estate websites. REO’s are normally vacant and should be thoroughly inspected prior to submitting a purchase contract.
3. In most cases, all liens will be removed with back taxes handled by the lender; i.e., the buyer normally gets the property free of liens. This is not always the case, though; refer to items #7 and #8 in the next section.
4. While foreclosure properties are often in deplorable condition, REO’s are usually restored by the lender to a minimum sellable condition. The listing company will usually be provided a budget for removal of trash, etc.
5. The lender that owns the property will often provide an allowance for specified repairs and/or buyer closing costs. The lender may also provide preferred financing.
Some Recommendations:
1. If you do not have experience working with REO properties, we recommend you work with a real estate agent that does have such a background. Prior to submitting an offer, your real estate agent should contact the listing agent to find out if there is anything unusual in the seller’s or servicing company’s paperwork and what normal seller expenses they do not cover such as conducting a property survey, conducting a termite inspection, treating the property for termites, etc. These expenses may be required by your mortgage company and, therefore, will become buyer costs if not paid for by the seller. So, you may want your offer to include a credit to cover them.
2. Many servicing companies charge a per diem such as $100/day if you cannot close as scheduled. Have your agent find this out in their call to the listing agent and if it applies, provide an ample cushion of time in selecting a closing date.
3. Servicing companies work in a number of different states. As a result, their paperwork will often include standard items or boilerplate that may not be applicable in your state. If you’re in an escrow state, the servicing company will usually designate the escrow company and/or the actual escrow agent to be used. The servicing company’s paperwork (contract addenda) will almost always be heavily weighted in their favor. There is usually a statement that if there is any conflict between their paperwork and the purchase contract, their paperwork has precedence. There is also usually a statement in their paperwork that the property was acquired via a foreclosure and the seller will not provide a property disclosure. The servicing company’s paperwork varies in length and complexity from company to company. It is very important to read it very carefully so you fully understand all the terms.
4. Most owners of homes that go into foreclosure have been struggling financially, which usually means the property has not received needed repairs or general maintenance for some period of time. The seller may agree to provide a buyer credit to cover some repairs; however, normally they will not make such repairs themselves unless it is to correct a safety hazard. Plan on having to make your own renovations and/or repairs. Have a contractor provide you cost estimates and then budget those costs into your offering price or credit.
5. The servicing companies have asset managers that work with listing agents. The amount of leeway given to an asset manager will vary considerably depending on the lender, the servicing company and the experience of the asset manager. Most communications between a listing agent and the asset manager are now done online; e.g., when an offer is received, the listing agent extracts key information from the offer and provides it to the servicing company via a form on the servicing company’s website. In some cases, a counter offer will be provided within hours while in other cases it may take several days and include a requirement to provide the actual offer to the servicing company and/or lender. So, be patient and anticipate that you may not have a response to your offer for some period of time.
6. The first counter offer from the seller is not necessarily their final answer. The servicing company may need to demonstrate to the seller that they are attempting to obtain a price within a specified range of the list price. Don’t be hesitant to counter the seller’s counter offer. You may go back and forth with counter offers several times before reaching a price and terms that are acceptable to both parties. Once a contract price has been established, it usually is very difficult to get the servicing company to agree to any additional expenses or credits. That’s why it is important to have the property inspected prior to submitting an offer.
7. Have the title company conduct an early title search for liens and outstanding taxes. One problem we’re experiencing these days, is service companies are listing properties before they have established clear title with ownership by the lender. This is a particular problem with non-judicial foreclosures.
8. Different states and areas of the country may have special laws or ordinances that apply to the sale of REO’s which is another reason for using an experienced REO agent. For example, Oahu has a law that states the buyer is responsible for paying up to six months of outstanding maintenance fees owed by the foreclosed owner (up to a maximum of $1,800). Therefore, it you are purchasing a condominium REO on Oahu, it is important that your offer cover this cost and make it a lender responsibility.
9. In many cases, a foreclosed owner has unsuccessfully attempted a short sale prior to the foreclosure. Then, the property went into foreclosure with an unsuccessful foreclosure sale by the lender. On Oahu, we are finding that many of the REO selling prices are considerably less than the short sale listing price. Have your real estate agent research the MLS history of any REO property you are considering.
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