Is buying an REO property a good idea? Part One.

So, you are interested in buying a home - you may have heard that maybe buying an REO property can be a good deal.  Well, is it really?  In reading this post, as well as my next one - I hope to be able to help you answer that question for yourself.  This is by no means legal advice - please contact your favorite attorney for that. 

The content in this blog is mostly my opinion, based upon my experience and what I know and have seen.  Who am I to tell you if buying a home, be it an REO or not - is it or isn't it a good idea?  I am a Colorado Springs Realtor who has been listing and selling REO homes for 10 years.  I know a little bit more than most local Realtors, a little less than some others - but just enough to do what I believe will help you - educate you so you can make that choice for yourself.

Quick definition if you didn't read last weeks post on what is an REO....
An REO (Real Estate Owned) property is one that has been foreclosed on by a lending institution due to the previous homeowner defaulting on making their mortgage payments.  Each state and each lender has different procedures to get from point "A" (default by the buyer) to Point "B" (lending institution now owning the property).  After the foreclosure procedure is completed - these lending institutions are now the proud owners of the property.  These Institutions call these properties, assets - they technically call them REO assets, or more quick to slide off the tongue: "REO's".

REO's are also sometimes called: Bank Owned Homes, or Bank Repo's, or Foreclosures.  There are some types of foreclosures that are called "HUD homes" - these are owned by the US Department of Housing and Urban Development (HUD) as a result of a foreclosure by a property owner who had an FHA insured mortgage.  The Veterans Administration (VA) also owns homes, as does Fannie Mae, Freddie Mac and just about every Mortgage Lending institution you have heard of, as well as many you may not have heard of.

So, back to your question: is buying an REO property a good deal?  The simple answer to that question is: It depends. 

Several factors are involved in buying a home, these factors really apply to buying any home, be it an REO property, or the one down the street owned by Mr and Mrs Nicepeople.  Generally speaking, when buying a house, 3 things are subjected to the sale.  There is of course: 1) The house itself.  2) The Buyer(s).  3) The Seller. 
*** In many cases, also impacting the sale of a home is the buyers lender, appraiser, home inspector, Realtors, friends, family, neighbors, schools, jobs and more - but lets just stick to the primary "impactees" here ***

Let's start with the last "impactee" and work our way backwards through the list.....

3) The Seller: As noted, each bank or lending institution comes to own their REO's most times when a homeowner defaults on their mortgage payments.  When that lender now owns the home - they sell them - to buyers or investors.  These Sellers' work primarily on selling each property to avoid as much financial loss as possible.  Often times, the Seller, in order to sell the REO property, will sell the home for less than what was previously owed on it.  

Several factors are involved in the reason behind that decision to sell it for less.
     a) It sells for less because that is what it is really worth.  You may or may not agree with the following: a house is really only worth what someone is willing to pay for it.  That is mostly true.  Market conditions usually give an accurate idea of what home values are.  If 3 houses in a particular neighborhood that are similar in sq ft, room count, features and condition sell within $10,000 or so of each other in a few months time - then it is safe to say another house of "like kind" would expect to also sell close to those values.
     b) It sells for less because the Seller wants to get rid of it from their books.  It costs money for a lending institution to own a house.  It cost them money to become the owner of it and it costs them money to maintain it.  Before a Lender owns a home - someone has stopped making mortgage payments on it, often times for many months.  So, the lender has lost money for months there. 
     Once a homeowner stops making payments, after several months (each lender and State is different as to how long that takes) the Lender then hires an attorney to file foreclosure proceedings.  Attorney fees are absorbed by that Lender, not the homeowner.  During the foreclosure proceedings and after they are completed - the foreclosing lender will usually send someone to inspect the property to see if it is occupied or vacant.  Another lender cost.  If the property is occupied, eviction proceedings - coordinated by attorneys (more cost) - begin.  If the property is vacant, then the seller contracts a local vendor for the purposes of securing it, often times cleaning it out of any left over items the previous occupant has left behind.  Sometimes the lenders contractor is tasked by the lender to repair it.  Most times the Lender will pay for the Utilities to be turned on and kept on.
     So, the cost to the lender adds up, tens of thousands or dollars usually on each home - and most lenders are owners of many REO properties.  Selling these properties gets them off their books - almost always at a loss to them - but the sooner the sell them, the (usually) lower the loss.

     c) The home sells for less because of the condition it is in.

Outside shows signs of abandonment

Inside is trashed

     Many REO properties are left behind by the previous occupants in a state of (politely speaking) neglect.  Not just junk left behind, but sometimes severely damaged properties.  The lender has no choice but to sell them at a price much less than other homes in the neighborhood.

Next post will be regarding the buyer and more to do with the house.  Check in next week....