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What is an REO Sale?
Banks use a specific process to offer REO properties
By Gilan Gertz
When banks or other lenders offer mortgage loans, they treat the loan as an investment. Homeowners slowly repay their mortgage loans during a long period of time. The interest the homeowners pay represents earnings for the lender. Banks can keep their own investors satisfied when they show a profit from interest paid on money they have lent. If homeowners do not repay their mortgages, banks lose money. They lose the initial sum they lent, as well as the interest they would have earned as the loan was repaid. Therefore, banks initiate a foreclosure process when mortgages are not repaid. If homeowners are unable to come up with the money, the bank offers the property at foreclosure auction. If no one buys at auction for the amount needed to repay the mortgage and foreclosure costs, the bank takes ownership of the home. The bank then sells the home as an REO, or real estate owned property.
Why don’t foreclosure auctions work? Given the popularity of foreclosure auctions, one might wonder why any property becomes an REO. Why doesn’t every property sell successfully at foreclosure auction, before it has an opportunity to move to REO status? Many foreclosure auctions fail to bring in any bids at all. Banks or other mortgage lenders do not set foreclosure prices according to the home’s market value. The lenders try to cover their losses and fees. The foreclosure minimum bid price usually includes the balance of the unpaid mortgage loan, interest owed, attorney’s fees and costs generated by the foreclosure process. Especially in a soft real estate market, that price could tower above market value. If that is the case, usually no one will offer the minimum listed bid price.
Foreclosures transform into REOs The money owed on a foreclosed property is often much more than the house’s value. Many foreclosure auctions do not result in the property’s sale, and the properties revert to their default owners: the mortgage lenders. An unsold foreclosure then becomes an REO, or real estate owned property. Most banks have REO departments. The REO specialists are in charge of preparing the house for sale and then setting a price. REOs are usually sold in “as is” condition, meaning the bank does not make needed repairs to the property. The bank typically removes all occupants and clears all liens against the house. The REO buyer will find a vacant property that is free of debts. It might be in excellent condition, or it could be in complete disrepair.
Putting an REO up for sale banks’ REO departments aim to sell REOs at a profit. Even if they have excess inventory of property, they will not offer a house at an unbelievably low price. They research market prices and comparable sales and set a fair price. As with any property, you might find a great deal, but don’t expect REOs to be severely undervalued. One way to find REOs is to contact lenders individually. You can look at banks’ and lenders’ websites, or call their REO departments to ask to see listings. The U.S. government, which lends mortgage money through various departments, also has REOs for sale. The government-owned homes are generally listed on websites. Contacting a Realtor is an easier, and often more reliable, method of identifying REOs. Realtor have listings of local REOs on the market. They understand the local market, so they can guide you toward homes that are well-priced.
Closing an REO purchase
Purchasing an REO is a complex process. Numerous bank workers at many levels of authority have to approve your offer. They will probably counter offer. You will have to be a savvy negotiator to purchase the home at a price you want. An offer on an REO sale should be written in a specific manner that includes a cover letter, stated willingness to buy the home in “as is” condition and an escape clause that lets you out of the deal if later inspection reveals extensive property damage. You usually may not inspect the REO before you send your offer. Choosing a price to offer takes research and thought. To increase the chances of your offer’s acceptance, offer at or close to asking price. If your research reveals that the house is overpriced, you might decide to offer below asking price, and include an explanation of your reasoning in the cover letter. When you buy an REO, you stand a good chance of buying a good home at a good value. Given the level of complication, you will benefit from hiring a team of experts to assist you. Experts can include a Realtor, real estate attorney and contractor. Each of those experts can help you successfully navigate the REO purchase process.
How Our Team Can Help you?
As Experts in the REO and Short Sale transactions we aim at representing the buyer/Seller from start to finish. Each case is unique on its own. Whether we are selling a short sale or a REO home our team of experts insures that our listings are cleaned and prepared for a professional sale. Our team has partnered with local experts in all fields that will benefit our customers in a very smooth , stress free transaction.
Feel Free to Call us or email us if you have any questions about purchasing or selling a Short Sale or REO property.