My guess is you are confused and actually thinking of buying an REO, short for Real Estate Owned by the bank.
Foreclosure is a trigger word. A word agents know you will call them about. Something they set the expectation of being a great value for the money.
These agents are spreading misinformation. Do not feel bad, blame the monkey phone game. The truth gets shared by the first person in the monkey phone game. This person passes the message onto the next and so on.
Once the message reaches the last agent in town, the REO is called a foreclosure. Monkey phone is not much of anybody’s fault. However, foreclosures, more accurately called REO(s), do not equal great value.
Let’s make sure you understand the truth before you get yourself in over your head.
What is an REO?
Foreclosure is a court process by which banks recoup unpaid debts from borrowers who fail to make payments.
Technically the bank owns no homes. They hold mortgages which secure homes as collateral. Here is how banks come to own homes…
The bank presents their mortgage to the court when the borrow fails to repay debt. The bank really does not want to own any homes though. They want to settle the debt. The court initiates the foreclosure process to help recoup the unpaid debt. The borrower is notified of their missed payments.
Foreclosure is automatically stopped if the buyer makes up their missed payments. The borrower must do this within a time frame defined. This time-frame is typically 6 months for judicial foreclosure process.
Otherwise, if the borrower fails to pay, the court auctions the home off. The proceeds from the auction go to the bank to recoup the unpaid debt.
Any member of the public, even the owner of the home, can bid at the foreclosure auction. The bank sets a reserve price for the auctioneer. The bank only takes ownership of the house if the reserve price is not met.
Any homes a bank holds in it’s portfolio after a foreclosure are referred to as REO(s). The bank’s intention is to settle the debt at this point.
Still buying a foreclosure?
There are actually a couple types of auctions. The second being Trustee Sale. Most banks use the trustee process here in Arizona because the process is 3 months as apposed to 6.
The trustee process has a 3rd party hold the Mortgage. When the borrower fails to pay the Trustee is notified and begins the foreclosure process.
The trustee is a person holding the Mortgage. They auctions the home in the same place, the courthouse steps. Last I checked, they require $10,000 to secure your winning bid. Followed by cash payment in full a few days later.
You have no opportunity to enter the home, no title insurance, no escrow, no contracts to protect you. A winning bid gets you the deed signed over to you and the bank’s lien cleared out. Everything else is AS-IS at your risk.
Contrast that with the standard Arizona Association of Realtors resale contract. You have blanket contingencies to protect you against title issues, mechanical issues, lending issues, etc. All liens are cleared out, and title is insured. There are no protections, no contracts, and no title insurance at the auction. You inherit any issues there were previously.
Buying an REO
The banks all have their own contracts. It is rare for a bank uses somebody else’s contract like the Arizona Association of Realtors Contract.
The bank’s contracts have few protections for you. You may get a blanket contingency in which you can back out due to title, lending, or mechanical issues. The house is typically sold AS-IS.
Each bank’s contract is different. Some have gotten a bit better since sub-prime mortgage crisis. However, this is the norm to expect.
Expect no help from bank when problems arise
Owners can voluntarily give their home to the bank, using a deed-in-lieu of foreclosure. Here the owner decides they have no intentions to keep the home so they hand over the keys and title. This is used in the event of reverse mortgages as we will discuss in story below.
We recently worked on an REO which was a former reverse mortgage. The buyer went against our advice and took the “free” title insurance offered by the bank. This title company failed to have the husband sign the deed-in-lieu of foreclosure when repossessing the house. A clerical error that came back to bite my client.
The home closed and the buyer discovered the husband was on title some months later. The bank was without comment, their title company incised the report was correct and the listing agent refused to help.
Our client an investor, was unable to sell the property without signature of the now diseased former owner. It took a lot of hard work but we were able to get it cleared up through another more reputable title agency.
Long story short, the bank is not out to win best seller of the year award. They want to recoup their expenses and get back to the business at hand, lending money. This may come at your peril.
There’s a lot of factors to consider in buying bank owned home. There are the unseen expenses we cannot plan for. Like my client’s title issues. Then there are the defects you will likely inherit as most every REO is sold as-is. These are mechanical issues like broken air handling system, leaking plumbing, roof troubles, etc. Lastly transaction expenses. They might include loan closing costs, escrow fees, transfer fees, and title insurance which banks seldom pay. You have to read each bank contract closely before you write an offer. Despite what the norm maybe, banks are always trying to push as many expenses off on you as possible.
After careful consideration you may still be interested in an REO.
Are REO(s) the least expensive?
REO(s) tend to close for less than others, however, there is no set rule. New construction typically to tops the market followed by resale, bank REO properties, and lastly short sales.
It is common for REO(s) to sell for more than market value. The keyword, “foreclosure” despite being the wrong term, is powerful enough to sway the market.
Agents parrot “foreclosures” as being the best bargain out there. This free notoriety pays off for the bank. The first days on market create a feeding frenzy. Buyers fight to purchase the latest REO properties.
These properties are the same as other homes on the market. However, their owner is not in the business of winning any awards at the next tour of homes. The real opportunity with REO properties comes after the feeding frenzy has passed.
Banks, religiously lower the price each month in a desperate attempt to recoup that festering unpaid debt. Here-in lies the opportunity, after the new REO excitement has faded.
Can any agent help with REO(s)?
Yes any licensed real estate agent can assist you with the purchase of an REO. However, the process is dramatically different from resale homes most agents are used to.
You really need an agent obsessed with the details. Each bank has different contracts. Each contract has different terms you must fulfil. Your good faith money is doubly at risk when you purchase an REO, especially if you use the bank’s free escrow.
Listings may require you pay to turn on utilities. This may in turn require you pay for a city or county inspection. All within a few days. Some contracts may require wet signatures mailed next day air. Others may require submitting an online bid.
My clients have done fantastically well with foreclosures despite all these challenges. I’ve had clients fix and flip them and live in them. Most all required a little sweat equity but they paid off with careful attention to the transaction.
You most certainly need an experienced agent to help you with this. They say you don’t know what you don’t know. Buying a REO or any real estate may feel like buying a car. You might think it’s just a bigger purchase. Truth is, it’s exceedingly complex with numerous entities involved from the government to banks, inspectors, contractors, and brokers.
I want to help you with your home purchase. I’m sure you have questions at this point and I would love to hear them. Please share your question below and I’ll share an answer with you…