Guide to REO Properties
When you’re looking to buy a home, you have more options than you might think. You can go the traditional route and work with a real estate agent to buy a home that’s been listed for sale by its owner. Another option is to buy a home through a short sale or during an auction. Finally, you might consider buying a real estate-owned property, or REO.
Buying an REO can mean you get a great deal on a home. An REO property also offers several other benefits you don’t get if you buy a home through a short sale or even during the typical home-buying process. Everything you’ve ever wanted to know about real estate-owned properties is right here.
Terms to Know:
Before we get into the process of buying a real estate-owned property or the benefits of doing so, it’s helpful to define a few key terms, so everyone is on the same page.
What Is REO?
REO is property a lender — such as a bank or other financial institution — has seized and foreclosed on. The lender has tried to sell the property at auction, but no one bid on it, or the bids they received weren’t high enough to meet the lender’s reserve.
When lenders approve mortgages for homebuyers, they have one goal in mind: having the buyer repay the loan, with interest. Lenders want their money back so they can continue to stay in business and make loans to other people or companies.
That’s not what always happens, though. If a person stops making payments on his or her loan, the bank or lender has the right to claim the property and foreclose on it, since the house or condo acts as the collateral for the mortgage.
Here’s the thing, though. A bank or other financial institution doesn’t want a home or other residential property. It has no use for a house. The foreclosed home typically becomes more of a liability for a lender than an asset, which is why lenders usually do what they can to make an REO more attractive to buyers.
For example, REO properties typically have a clean title, and the bank has cleared any liens that were on the properties. Institutions that have REO properties also typically offer them at a below-market-value price and might even be open to negotiating decent loan terms with the right buyer. The bank also has completed eviction proceedings to remove the non-paying former owner from the home, or has made a sort of “cash-for-keys” deal with the previous owner to get him or her to vacate the property.
What Is Bank-Owned Property?
A bank-owned property is merely another name for an REO property. It’s a house or other piece of real estate that has gone through the foreclosure process, was not sold at auction and ended up being owned by the bank or lender.
What Are Asset Managers?
Asset managers are the people or companies hired by the bank or lender to take care of any REO properties. An asset manager works to make the property ready for sale, and is responsible for hiring anyone else who will have a role to play in the foreclosure or sale process.
A few of the responsibilities of an asset manager include:
- Hiring attorneys, title companies, property preservation companies and an REO agent.
- Getting different opinions about the market value of the property.
- Sending a cash-for-keys offer to the occupant, assuming the property isn’t vacant.
- Overseeing property clean-out and winterization.
- Putting the property up for sale through the REO agent after sheriff’s sale/auction.
What Is an REO Agent?
An REO agent is a real estate agent who specializes in the sale of REO properties. If you’re wondering how to find REO properties for sale, or how to find bank-owned homes, your best bet is to work with an REO agent.
As you might guess, there are fewer REO agents in any given market than there are standard real estate agents. Depending on the volume of REO properties in a given area, a single REO agent might have dozens, if not hundreds, of active listings at any time. Typically, REO agents have listing contracts with local asset management companies.
What Are Bank Addendums?
Bank addendums are additions to the purchase agreement or contract between a buyer and the lender/bank. As you might guess, bank addendums usually provide some additional benefit to the bank, often at the expense of the buyer. The content of an addendum can override anything that was in the offer made by the buyer.
The sticky thing about addendums is this — you can’t move forward with the purchase of an REO property without agreeing to the bank addendums. And banks tend to be looking out for No. 1 — that is, themselves. One example of a typical addendum is the requirement that the property is sold “as-is,” meaning you can’t ask the bank to pay for any problems that crop up during the inspection.
In some cases, the addendum might add fees to the cost of the sale, or might shift certain responsibilities, such as paying some taxes, onto the shoulders of the buyer. An addendum might also give the bank the ability to cancel the agreement up through the sale date.
REO vs. Short Sale
People occasionally confuse a short sale with a bank-owned property, though the two are very much not the same thing. One of the biggest differences between a short sale and an REO is who owns the property. The original owner still owns a house that is up for short sale, while the lender has taken possession of an REO property.
What Is a Short Sale?
Sometimes, the amount a person owes on a mortgage differs from the market value of the home he or she wants to sell. In some instances, the value of the house is more than what’s owed on the mortgage, so the seller walks away with some cash in his or her pockets.
In other cases, the seller ends up owing more on the mortgage than the home sells for or could sell for. If the lender that owns the mortgage agrees to accept the sale price of the home, even though it doesn’t cover what’s owed on the loan, a short sale occurs. In the first quarter of 2016, around 5 percent of all home sales in the U.S. were short sales.
Usually, a lender will only agree to accept a short sale of a home if the owner is clearly having trouble making the monthly payments on the mortgage. In those cases, a bank might decide that it’s better to get a portion of what is owed, rather than move through the foreclosure process and end up with an REO property to unload.
That said, short sales aren’t a perfect solution, and they can be more complicated than they look on the surface. For one thing, unlike an REO property, buying or selling a short sale property doesn’t wipe out all the liens on the real estate. A buyer who purchases a home during a short sale might end up buying a property that doesn’t have a clean title.
Other drawbacks of a short sale, especially for a buyer, include:
- Long closing process — it can take up to nine months for the sale to become final.
- House is sold “as-is” and might have a lot of unpleasant surprises. The buyer can end up with a money pit.
- Anyone with a stake in the property, such as lien holders or second-mortgage lenders, can jump in and disrupt the sale.
- Closing costs can be higher, since the seller and lender are usually less willing to chip in for “extras” which would be negotiated during a typical real estate sale.
Why a Lender Might Decide Against a Short Sale
There are a few reasons a lender might decide a short sale isn’t the way to go and might decide to move forward with a foreclosure, ultimately taking possession of the property.
- The lender might be better off collecting mortgage insurance on the home than having it sold at a loss.
- The current owner of the home isn’t able to prove he or she is struggling to make mortgage payments.
- The current owner of the home refuses to cooperate with the lender or files for bankruptcy, which would prevent a short sale from going forward.
How to Find REO Properties
In many ways, finding REO properties is similar to finding a typical house for sale. It’s just that instead of communicating with a seller who’s an individual, you’ll be interacting with a financial institution. You’ll also want to work with an REO agent, rather than a conventional real estate agent, as you’ll want someone who knows the process of buying and selling REO properties inside and out.
Step 1: Get Pre-Approved
You can get financing to buy an REO property if you need it. To get that financing, you’ll have to approach a lender for pre-approval. Getting pre-approved for a mortgage has several benefits. For one thing, it tells your REO agent you’re serious about buying a bank-owned property. For another, it allows you to move quickly if you do find the right REO property for you. You’ll have your financing paperwork in order, will know how much you can afford and will be able to make an offer without having to wait.
Step 2: Find Your REO Agent
Working with an REO agent when you’re trying to find and buy a bank-owned property has several advantages. Sure, you can find REO listings online or by contacting lenders directly. But an REO agent will let you know about properties for sale before they become available to the public. REO agents have relationships with local asset managers and can get you the scoop before anyone else.
Step 3: Check out REOs
Depending on where you’re looking to buy, there might be a multitude of REO properties to check out, or there might be just a few. Visit the REOs you are interested in with your agent, then decide whether or not you’d like to move forward and make an offer on any of them.
Step 4: Make Your Offer
Your REO agent will help you put together an offer on the property. But you can expect your offer to include a letter with the amount of your initial offer, a statement that you understand that you’re buying the property “as-is” and a clause that gives you an out if a home inspection reveals that the property would need extensive repairs.
Your agent can provide decent guidance when it comes to how much you should offer for the home. In some cases, it makes sense to offer what the bank wants. But if your agent suggests the bank is overvaluing the home or hints you could talk the bank down, it might be worth it to offer a little less.
Step 5: Schedule the Home Inspection
Even though you’ve agreed to buy the house as-is and won’t come back to the lending institution asking for a list of repairs, it’s still a good idea to have a home inspection before you close on the property. The home inspector can give you an idea of any damage to the property, the extent of the problems and an estimate of what it would cost to repair any issues.
At that point, you might go back to the lender and let it know if you’re willing to move forward with the sale, or that the damage is just too much for you to handle.
Step 6: Line up Your Repair People — If Needed — and Prepare for Closing
Once the inspection is over and you’ve agreed to move forward, all that remains is closing. You might also want to start calling around to repair people or tradespeople to get quotes for any problems that need fixing in the home before you move in.
How to Find Bank-Owned Properties in York, PA
You have a few options if you’re looking to find foreclosures in York, PA. The county’s sheriff sale listing page features a list of all the active or recently canceled sheriff’s sales in the area. You can see the bid amount on each property, the location of the homes and the names of the current owners.
You can also look for foreclosures or REO properties on websites that list foreclosures and home sales, including Auction.com and HUDHomes. But if you want the most up-to-the-minute information on REO properties, or if you want to learn about available properties before anyone else, your best option is to partner with an REO agent in York.
Why Contact an REO Agent
Because REO properties can be a great value for buyers, they tend to move quickly once they come on the market. They don’t have the complexities or potential loopholes short sales do, so a buyer who needs a house immediately is likely to move quickly when the right REO comes available.
You want to be proactive about contacting an REO agent, as he or she will be your best bet for finding out about eligible bank-owned homes before anyone else. REO agents are connected to the asset managers who list properties for sale, so they are on the inside track and get all the details before the rest of the world. Your agent will contact you immediately once a home that fits your budget or meets your needs becomes available.
In York, PA, you can turn to Century 21 Core Partners if you’re looking to buy a bank-owned property and need an REO agent. Visit our Agents page today to learn more about who’s who on our team and to get in touch with a real estate agent who specializes in foreclosures and REO properties.
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