What Are REOs Anyway?

This is part three in our series on formulating a real estate investment business plan.

Plenty of articles around the place talk about REOs, but what are REOs anyway? Many won’t realise that a REO property is actually in foreclosure: if a foreclosure auction property does not sell, then it becomes a REO (real estate owned). REO’s are bought back by the banks that foreclosed on them and then offered for resale. All REO’s are listed by the lenders that own them with local realtors, who market them in the MLS and other places to potential qualified buyers.

Sign and tumbleweeds, Salton Sea, Mojave Desert 2009 © by fotogail

Banks are tough to deal with so do your due diligence and be prepared. You make an offer through the bank’s Realtor or your own Realtor. The bank usually chooses the title and escrow services and may have special language that you have to agree to in their contract. Usually banks use their own riders and amendments that the buyer must agree to. There are no warranties or representations and the homes are sold as is. You can negotiate an inspection contingency and a financing contingency.

Banks and REOs – there is no disclosure obligation!
Generally, banks don’t make any repairs, but it doesn’t hurt to ask after the inspection if there is mould or some other repair you want them to make or give you a credit for or reduce the purchase price. However, keep in mind that most distressed homes are priced to sell so don’t expect to negotiate the price after you have an accepted offer.

Also, banks are not required by law to disclose anything they know about the property. Real estate property disclosure laws do not apply to banks because they have not resided at the property. That is why it is so important that you as the buyer investigate everything about the house so you know what you are getting. This means also checking with the city to make sure there are permits and that the home is in compliance with local zoning codes and ordinances or has been grandfathered in.

When you purchase a home from a seller other than a bank or a trust, they are required to disclose any material items they know about the home. With a distressed REO or auction property, the burden is on you to investigate.

Remember that not every foreclosure, REO or short sale will be a great buy, or an easy one. Do your research and due diligence – and never, ever jump into a sale without it.

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