When a property is foreclosed on, a bank is required to offer the property at auction. Usually the auction is unsuccessful because the bank asks for the owed amount on the property. This is almost always greater than the assessed value of the property, and thus purchasing at the auction would be unwise.
When the property doesn’t bring in a bid, the property reverts back to the lending institution that held the mortgage of the foreclosed property. The property then becomes a real estate owned property (REO). REOs are bank owned properties. Here’s what you should know:
Banks are Long-Distance Sellers
If you are interested in purchasing an REO, you should know that working with a bank is not the same as working with an individual seller. Banks that hold the mortgage may be across the country from the actual property and thus they hire a real estate agent in the property’s vicinity to manage the property for them.
The real estate agent assess the estimated value of the property, informs the bank of any recommended repairs they may want to complete, may hire someone to inspect the house, and serves as the negotiator between the bank and the potential new owner when it comes to price and other legal matters. If you’re considering buying an REO, know to be patient and polite to the bank’s realtor because they literally hold the keys and have to negotiate with a less than concerned client.
Properties are Sold “As Is”
Banks usually want to sell the property “as is.” The less money they put into the property, the more money they will get back from the defaulted mortgage. If you want the house inspected for things like mold, lead, asbestos, or Chinese drywall, you will need to hire an inspector on your own terms to inspect the property for you. The bank will usually not agree to fix anything that might be wrong with the house, but they will sometimes allow a clause that allows you a certain amount of time to back out of an agreement if a serious problem is found.
Call an Inspector and Contractor
Before you purchase an REO, you really should have the house inspected. This ensures not only against problems like the ones listed above, but will also make sure that you have an idea of other repairs that may need to be done to the house, such as furnace repairs, foundation work, or plumbing repairs.
If there are any repairs that need to be made, you should contact a contractor to understand how much these repairs will cost, even if the repairs seem minimal to you. Add the estimated costs of the repairs on to the price you might pay for the property. After doing this math, the property may not look like as much of a bargain as it originally did. An advantage of buying an REO company compared to an auctioned property is that you are able to thoroughly get a sense of the property before you purchase.
While REOs may seem like a steal, banks want to collect as much money as they possibly can from a property, so don’t buy and REO just because of the price. Make sure that you do your homework before you put in an offer– the amount of time and money you might have to put into repairs may not be worth it.
If you’re looking for guidance through an REO purchase, you should go ahead and retain an attorney who specializes in real estate law. You’ll need a real estate lawyer eventually to close on the property anyway- by hiring one early in the game, they can assist you through the complicated matters that sometimes surround REO properties.