What exactly is REO foreclosure and what does it mean for buyers?
In some situations, banks may own real estate because the property has been acquired through the foreclosure process. When a home is on a bank’s book it is referred as REO, which stands for real estate owned. In cases in which a homeowner falls behind on the mortgage payments, the bank that holds the mortgage for the property will begin initiating the foreclosure process. If the homeowner does not get caught back up on the payments within the specified timeframe, the bank may attempt to auction off the property. A property becomes real estate owned, or reverts back to the bank, if no one bids the minimum amount for the current mortgage in the auction.
A bank is not designed to hold onto real estate and naturally does not want to have real estate sitting on its inventory. When the property in question does not receive the minimum bid from a home buyer or investor during the foreclosure sale, which typically takes place at the courthouse, the bank may then price the property for less than the existing mortgage in an attempt to get the property off its books.
If the property listing is fairly new to the market, the bank may not deviate much from the balance of the existing mortgage. Buyers who are considering the purchase of a REO foreclosure may find they have more negotiating power by making offers on REO properties that have been on the market for at least 30 days. During the first month that a property is on the market, the bank is usually waiting to see what kind of offers will be received and is therefore less likely to accept offers that are lower than the asking price.
At one point, during the height of the housing and foreclosure crisis, many banks were willing to pay the usual closing costs for the buyer in an attempt to move as many REO foreclosures off their books as possible. Such fees often include county and state fees, transfer taxes, etc. Today, that is no longer the case. Buyers who are looking to buy REO foreclosures should be prepared to pay their own closing costs, including any necessary repairs, pest reports, and home warranty plans. In most cases, REO foreclosures are purchased in “as is” condition.
The process of purchasing a REO foreclosure can often be somewhat different from purchasing a home from the original owner. When submitting an offer to purchase a REO, be prepared to be patient, as it could take the bank several days to respond. Buyers should also be prepared for the bank to draw up its own addendum or purchase contract in addition to the standard purchase contract. In such cases, buyers should read through all documents carefully and consult a real estate attorney for guidance.
Are you considering the purchase of a REO foreclosure? If so, let our experienced team at Realtywise guide you through the process.