What is an REO?

An "REO" is a commonly-used acronym for "real estate owned" by banks. Instead of an individual person or persons owning the property as in a typical resale transaction, a bank owns the property instead. The bank typically acquires title to its REO properties through the foreclosure process. However, REO properties may also be acquired through other means, such as a deed-in-lieu of foreclosure, tax sale, or corporate housing.


Is an REO sale the same thing as a foreclosure sale?

No. A foreclosure sale is the sale of real property, usually at an auction, generally triggered by a homeowner's inability to pay a mortgage loan. An REO sale, on the other hand, is the sale of property owned by a bank. Let's say, for example, a homeowner has a mortgage loan secured by his home. If he defaults on his mortgage loan, his lender may initiate the foreclosure process and eventually acquire the property at a foreclosure sale. Upon the lender's acquisition, the property becomes part of the lender's REO portfolio. The subsequent sale of that lender-owned property is commonly called an REO sale.


Why are there so many REO properties lately?

The high volume of REO sales is a result of the high volume of foreclosure sales in recent years, as well as the nature of foreclosure sales. When a property is foreclosed on, the lender often acquires title to the property at the foreclosure sale, although it's possible that someone else acquires title. More specifically, when an owner fails to make mortgage payments, the lender may commence the foreclosure process to sell the property to satisfy the defaulting borrower's debt secured by that property.

Foreclosure is commonly handled through a trustee's sale (not court action) where the property is sold to the highest bidder at an auction open to the public. At the trustee's sale, the foreclosing lender may make a credit bid in the amount of its unpaid debt plus foreclosure costs, but the trustee typically requires any other accepted bid to be paid in the form of cash or cash equivalent. Because of the onus of paying cash, rarely does anyone outbid the foreclosing lender at the trustee's sale. Once the foreclosing lender acquires title to the property by trustee's deed, the property becomes part of that lender's REO portfolio.


Why would someone wait to buy a property from an REO lender, rather than acquire it as the highest bidder at the trustee's sale?

Acquiring property as the highest bidder at a trustee's sale is likely to have a higher potential for return than buying the same property from the REO lender after foreclosure. However, many people are not in a position to pay all cash for real property as is often required for trustee's sales, but not for REO sales. Furthermore, buying from an REO lender may be less risky, because a foreclosure sale purchaser often has no opportunity to inspect the interior of the property before buying it, despite the possibility that the property may be distressed or occupied by tenants or previous owners. Acquiring title to an REO property may also be less risky because an REO lender is likely to take care of certain title issues, such as unpaid property taxes. Indeed, it can be very difficult for a buyer to obtain title insurance when acquiring property at a trustee's sale, but not an REO sale.


What are the general characteristics of an REO transaction?


Some of the major distinguishing characteristics of an REO transaction are as follows:

- Lower Price: First and foremost, an REO property tends to sell for a lower price than other comparable properties, depending on local market conditions. That's precisely what generates so much public interest in REO properties. Some experts, however, consider the discounts to be limited, especially given the possible distressed nature of REO properties.

- Bank Representatives: The seller in an REO transaction, the bank, acts through its employees and representatives. An REO lender may outsource the management and disposition of its REO properties to asset management companies. Unlike other sellers, the REO employees and representatives have not occupied the properties, and have no emotional attachment to the properties they are selling. The REO properties may be generally characterized as unwanted assets, although the banks want to demonstrate to their investors that they sold these assets for the highest prices possible. Indeed, because REO lenders and their asset management companies have a lot of inventory to sell, they possess certain leverage when negotiating listing and sales agreements.

- Timing: An REO transaction is generally more cumbersome and takes a longer time to process compared to other resale transactions, from negotiating an accepted offer to closing escrow. Whereas other resale sellers may be able to answer questions instantaneously, a question posed to an REO lender may have to go through the asset management company and several levels of approval at the bank; and they don't work evenings or weekends.

- Transactional Features: An REO listing or sale has many transactional features that differ from other resales. For example, an REO lender may want to use its own forms, such as its own status reports or sales agreements. An REO sale has its own set of disclosure requirements. An REO lender may offer attractive loan terms to help its buyers finance their purchase transactions.

Asset management companies are companies that REO lenders may hire to oversee the sale of their REO properties. Some asset managers work in house for a department or division of the bank itself, whereas others work for a separate legal entity altogether.


Why are REO properties sometimes characterized as distressed properties?

Some REO properties are no different than other properties for sale. However, REO properties may be distressed as a result of simple neglect, intentional vandalism, or both. As for neglect, before an REO lender even takes over a property, the previous homeowner was likely to be experiencing financial difficulties, and thus also likely to have foregone ordinary maintenance and repair of the property. As for intentional vandalism, when some homeowners lose their properties through foreclosure, they have been known to take their anger and frustration out on the property. They may strip a property of its fixtures, cabinets, appliances, and even copper plumbing, as well as damage the property by smashing out the walls, breaking window panes, pouring cement down the toilet, or flooding the property by leaving the faucets on.

Things may not improve when the bank takes over the property. An REO property may sit vacant for many months with the utilities shut off, which makes it susceptible to further neglect and vandalism. Even absent any neglect or vandalism, there is the possibility that a piece of property posed such serious issues for the previous homeowner (e.g., significant structural defects or neighborhood problems) that, coupled with market conditions, the previous homeowner purposely decided to get rid of the property through the foreclosure process.

Successfully purchasing an REO property requires an understanding of the REO specific market, knowledge of the value of surrounding properties, understanding what the Asset Managers are looking for when considering accepting an offer and strong negotiation skills throughout the transaction. If you are considering buying an REO property, I would be happy to assist you by providing a list of REO properties and representing you in the transaction. Please feel free to contact me at: 209-833-7777 or sales@tracyhomes.com

 

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