A big reason there’s still so much inventory out there is the amount of REO property on the market. Real estate owned or REO is a class of property owned by a lender—typically a bank or government agency—after an unsuccessful sale at a foreclosure auction. REOs can be a great deal – they are typically priced well below value. What should buyers know, especially if they’re thinking of purchasing one? We asked Joan Maloney, a real estate attorney, for the biggest challenges buyers should beware of when it comes to purchasing an REO property.
- Bank/REO Lender Contract amendments are usually stringent and non-negotiable. Buyers must sign up front, or their offer will not be presented.
- Multiple offers are taken at once and then…you have to wait. “There is always a delay in getting a signed agreement,” Maloney says. “Be prepared to wait - although, faster than short sales, REO sales are never "quick" sales.”
- Failure to obtain condo information from property management companies due to high costs for information will often cause delays – REO banks may not pay for condo information and for single family houses, they may not provide a survey due to the cost - which in turn, limits the coverage under your title insurance.
- REO lenders usually have to wait to obtain the required water certificates from the City of Chicago - they cannot be ordered at the title company's table, as is standard resale transactions. Guess what that means? More delays!
- REO listing agents are at times, nonresponsive, due to the number of files they are trying to move. Good luck getting an answer or setting anything up with an REO listing agent.
- There is often a buyer/lender delay – which in turn, requires specific extensions forms to be completed, which may or may not be granted by the REO lender.
- Failed inspections due to condition of property. “If the inspection fails - there could be more delays or no sale at all,” Likewise, the appraisals may come in too low. Maloney says.
- If the seasons have given your area a harsh winter or brutal summer, think about this: properties are often "winterized" - REO banks will not pay to turn on the water, heat, electricity, or other utilities. This could cause further damage to the property and limits the buyer's inspection to the property.
- Forget winterizing – some banks won’t even maintain the property - which can run afoul of certain city ordinances. City violations start stacking up - and the buyer may have to assume the violations and/or litigation at closing. In addition to the affect the REO property's value has on the neighborhood, is also why some REO properties are a sight for sore eyes – overgrown grass, chipping paint, broken windows and vandalized, stripped properties are never attractive.
When dealing with an REO purchase, banks are notorious for not being cooperative. But if you’re set on an REO, if you’re patient, maybe you can eventually live in your new home.