Ask Andrew: REO Vs. Foreclosure
By: Andrew Goodman
Q: What do I need to know about foreclosures and what is the difference between a foreclosure and REO?
A: REO stands for real estate owned. This is a property that a mortgage lender takes into its portfolio as a result of a foreclosure on a home that was not sold during a foreclosure sale. REOs are typically what you see listed by Realtors on various websites.
A foreclosure is a property that is being sold by the lender after several attempts have been made with the current owner to catch them back up on delinquent payments.
A foreclosure sale is basically an auction sale with a minimum starting bid that includes the loan balance, any accrued interest, attorney’s fees and any costs with the foreclosure process. The bid process at a foreclosure auction requires you to have a cashier’s check in your hand for the full amount of your bid.
If you’re the successful bidder, you receive the property in “as-is” condition. “As-is” condition could mean someone could still be living in the property and you’ll have to deal with the eviction process. You may also have to deal with any other liens that are against the property and the actual condition the property is in.
When purchasing an REO, please work with an experienced Realtor, as the process can be grueling. But the purchasing situation can be more advantageous than purchasing a property through a foreclosure sale.
An REO is a property that no longer has a mortgage attached to it, as the bank already owns the property.
Since the bank owns the property, they already will have dealt with the eviction process, may have done some repairs, negotiated with the IRS to remove any tax liens and paid off any delinquent condo or HOA dues.
So what’s the point of purchasing a home in a foreclosure sale when there are so many risks?
Well, if there are a lack of bids on the property, the bank may be willing to sell the property at a discount or provide some sort of lender financing to prevent the property from going on their books.
When purchasing either a foreclosure or an REO, keep a few things in mind. The bank doesn’t want to hold onto properties. They’re in the business of providing loans, not managing properties. They’re going to do what they need to do to get the properties off of their “books.”
A foreclosure sale is the lender’s first attempt to recoup their losses. A bank would prefer to sell the property at a foreclosure sale because if the property does turn into a REO, they could have to deal with several institutions to make the property more sellable for a potential buyer, which could involve investing more resources in an already bad investment.
Most buyers believe that when purchasing an REO, they are going to get a deal. That may not always be true.
Yes, typically a bank will want to unload a property at a discount to get the property off the books. However, do your research. Be sure to know the market, comparable sales and other details before making your bid. The bank is going to do everything in their power to limit their losses. Most banks have entire departments strictly dealing with their REOs.
When purchasing an REO, a buyer typically is purchasing the property “as-is.”
That doesn’t mean the buyer cannot have an inspection. I highly recommend having an inspection on any property you purchase, especially an REO. Even though you are purchasing an REO “as-is,” still try to ask for work to be done, if necessary, or maybe even a credit.
The worst thing they can say is no. Sometimes they’re willing to re-negotiate in hopes that the property does not go back on the market.