Bargain hunting in the ‘REO’ market

December 30, 2009

 

POP QUIZ:  What is an REO?

A.  The name of the REO Motor Car Co., which produced vehicles from 1905 to 1975.

B.  The name of the ‘70s rock band REO Speedwagon.

C.  Real Estate Owned by a bank.

D.  All of the above.

If you selected “D” you’re right.  However, if you’re interested in buying a house in today’s market, the only answer is “C.”

Banks don’t want to be in the real estate business, but inherit REO properties through the foreclosure process after a homeowner-borrower stopped making mortgage payments.  If a foreclosed property does not attract bids at an auction, it becomes an REO property.

According to First American CoreLogic, a Santa Ana realty statistical firm, nearly a quarter of U.S. homeowners are “upside down” — they owe more on their mortgages than their homes are worth.  This phenomenon is driving the growing number of REO properties.

The hike in REO homes has made the category No.1 in today’s market.  REO offerings can be easy to spot: Look for houses with brown and dead lawns.

More conventionally, you can contact any realty firm or bank for their REO listings.  Computer-literate buyers can use Google to find an REO specialist by simply inputting “REO” and a bank name like “Wells Fargo,” in the search fields.

OK. You’ve found an REO specialist and you’re now ready to find an REO home.  That’s the easy part.  The hard part is buying it.  REO homes are easy to find and hard to buy.  Throw out everything you thought you knew about buying a house.

Remember, banks don’t want to be in the real estate business, so they are seeking the easiest transaction possible.  This means they want a “clean” offer, such as contracting to purchase the property “as is” and without contingencies.

For example, don’t write in your offer that you want a pest inspection or a price adjustment for a leaky roof. Those contingencies will cause your offer to be round filed. If you ask too much, the bank will go for an offer with less resistance.

Mandatory pest and roof inspections, required with some loans, often are deal killers when it comes to buying an REO home. Factor in needed repairs when making your bid.

That brings us up to the price you’re going to have to pay for your piece of the “American Dream.”  Banks typically price REO properties 20 percent or so below the true market value. This often results in 40 or more offers for the property and offers above the asking price.

Banks also look more kindly to offers that feature an all-cash purchase, a large down payment, a short escrow and even a larger than required initial deposit.

I recently made an offer on an REO residential property in Turlock.

Working with an REO specialist Realtor, my written offer was for more than the asking price, was all cash, had a short 20-day escrow and accepted the property “as is” without any contingencies.

I got it.

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