Buyer beware – the ABCs of buying REOs
Home buying and selling patterns are shifting and the San Fernando Valley is no exception. With many short sales failing due to banks not approving offers, most of those homes foreclose and become the property of the lender. This article will explain what buyers can expect and what they should understand before making offers on such properties.
Bank-owned properties, aka REOs (Real Estate Owned), are generally listed on a Multiple Listing Service (MLS) by the bank’s listing agent. The bank will have set a listing price based on one or more valuations of the property by a licensed appraiser and broker price opinions (BPOs) by the listing agent and usually a second agent.
Making an offer on the property can take several paths. Sometimes the bank will accept and reject offers much in the way a human seller would: one at a time, as they are received. Another strategy is for the bank to instruct its listing agent to place a deadline by which time all offers must be received. The bank will then collect and review all the offers together and make a decision within 24 to 48 hours.
The point of collecting offers within a specified period and choosing the best offer is to maximize the final sales price the bank will receive on the property. When a property has been returned to the bank, usually the bank has lost anywhere from 20% - 50% of the value it loaned. And that’s not counting the holding costs it incurs before the property finds a new owner.
Where the sale of an REO differs from that of a conventional home sale is in the terms. Bank-owned properties are sold “as-is”; that means the banks will generally make few or no repairs on a property unless there is a hazardous condition such as exposed electrical wires or state-mandated repairs, such as installing a gas shut-off valves, smoke detectors and low-flow toilets. This differs from conventional sales in which the buyer can request that repairs be made or that the amount of repairs be deducted from the sales price following the buyer’s physical inspection of the property. Remember: the bank is trying to minimize its already large losses on the property. So it is imperative to understand that when the bank says it is selling a home as-is, that is another way of saying “take it or leave it”. This is why it is critical for the buyer to have a thorough understanding of what the costs are before the purchase has been completed. If the buyer is unwilling to underwrite those expenses, he or she should cancel the agreement before all contingencies have been released.
Another difference between conventional and bank property sales is that banks are also less willing to credit the buyer on the closing costs. Again, this is due to the fact that the bank is trying to mitigate its losses but the more recent reason is that there are often multiple offers on bank properties, with many of the buyers not requesting credits in order to make their offers appear stronger to those of their competitors.
The last fable about purchasing an REO is that the banks are desperate to sell and will do so at steep discounts. Except for properties in unattractive areas, that is a prescription for losing a bid. REOs are listed with an REO agent in order to maximize the number and quality of offers and most of them sell at a market price. Any discounts reflect the amount of repairs required to make the property habitable by the new homeowners.
In summary, if you are interested in purchasing an REO, know that the repairs will be your responsibility and that you will probably have to pay your own closing costs. If you understand these conditions and accept them as ground rules, you are more likely to be successful in purchasing the REO.
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Buyer beware – the ABCs of buying REOs
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