REO & INVESTOR'S CIRCLE
What is an REO property? An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. Banks and mortgage insuring companies will typically attend the auctions to make sure they obtain the property back if they do not have a successful bid by the public to satisfy the loan and/or receiving a fair market price on the property -- regardless of its current condition. The bank will repurchase the property to acquire for future sale.
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs associated with the foreclosure process. If you are the successful bidder, you receive the property in "AS IS" condition, which may include someone still living in the property. There may also be other liens against the property and you should do your research in obtaining such information.
Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale, afterwhich the property reverts to the bank. The property then becomes an REO property.
What happens next? The bank now owns the property and the mortgage loan no longer exists but remains as a debt to the prior mortgagor. In Ohio, there is a right of redemption law which enables the prior mortgagor to reclaim the property by means of repurchasing it from the bank and making them whole. The additional fees will likely include but not be limited to: foreclosure and attorney fees, prep, court costs, documentation and satisfaction of secondary loans, any delinquencies on the property and to satisfy any and all liens and judgments.
The bank will handle the eviction, if necessary, order multiple opinions and appraisals and secure the property if found vacant or abandoned. After such redemption period has expired and sale is confirmed, the bank will order maintenance services and market the property typically through a licensed real estate broker. They will negotiate with the IRS for removal of tax liens and pay off any homeowner's association dues they are required to from the date of foreclosure and forward. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.
A bank owned property is only a bargain when you have done your due diligence. Do your homework before making an offer. Make sure that the price you pay (if you're successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them and check your local zoning laws and if your city has any Point of Sale required inspections and the time frame allowed for the buyer to make those repairs.
How do banks sell REO properties? Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory. Once you make an offer to purchase, banks generally present a "counter-offer." The counter will be based on prior appraisals and broker price opinions on the property. Your offer or counter-offer will likely require review or approval by several individuals or entities involved in the management of the asset. Every dollar counts....and cash is preferred over financing most of the time. You could potentially be bidding against other buyers for the same property - this is when "multiple offers" are collected and the bank determines the offer best suited to meet their goals.
Property Condition Banks typically sell a property in "AS IS" condition. Banks will allow you to get inspections (at your expense), but they may not agree to do any repairs. This is a key consideration for any buyer as the property must pass the lender's appraisal which typically require all utilities to be functioning and turned on for such. Banks may or may not have utilities turned on for liability reasons, condition or other purposes whereby the buyer has the expense of doing so.
You may opt to include an inspection contingency period that allows you to determine the next course of action if the inspections reveal unanticipated damages the bank will not correct. Because there is typically no known history of the property by the bank or any real estate broker you should consider all aspects of the offer.
Even though you agreed to "AS IS" condition, always give the bank another opportunity to make repairs or give you a credit after you've completed your inspections. Sometimes they'll re-negotiate to save the transaction instead of putting the property back on the market...sometimes they will not. Remember, the worst they can say is "NO". However, keep in mind the less potential hang-ups they have to deal with such as financing or inspections the more willing they may be to consider your offer.
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