REO (Real Estate Owned) Properties 

by Mikey and Steven Hall

The acronym REO stands for the phrase "Real Estate Owned." An REO is a lender owned property, meaning it has been acquired by the lender as the result of a foreclosure.

Short Sale

In the normal course of events a distressed home moves through a series of stages which are many times confused by the general public. In the beginning, when the homeowner is trying to sell the home for an amount less than the debt owed on the property it is called a Short Sale.

Foreclosure

Foreclosures begin when the Trustor (borrower) stops making the monthly payments to the Beneficiary (Lender). The first missed payment is a technical default, but in practical terms, most Beneficiaries do not begin the process until the third payment is missed. During this time period the property remains classified as a short sale.

When the owner becomes 90 days late on the mortgage payments, Beneficiaries typically record a Notice of Default (NOD) and the Foreclosure Process begins. The property is now called a Foreclosure and is sometimes typified as "being in Foreclosure", however it is still a Short Sale.

REO

A trustee sale date is set for about three months after the NOD is recorded. On the sale date, the property is offered for sale at auction. The successful bidder must pay cash for the property. If no one purchases the property, title is transferred to the Beneficiary (Lender) and the property becomes an REO.

The Lender now has title to the property. The Lender will establish a market value for the property then assign the property to to an outside company which specializes in the handling of REOs. This company, in turn, assigns the property to a local real estate broker who will list the property for sale on as "AS IS" basis. This means generally there will be no repairs.

It must be remembered that the lender is an owner who has never "lived" in the property. That means there will be very few, if any, disclosures from the Lender. The burden will be on the buyer to determine what's wrong with the property and how much it's going to cost to fix it. Moreover, most lenders either use their own purchase contract instead of the CAR approved contract or require their own contract addendum. Many Lenders will also require the buyer to pre-qualify with them, and some even require the buyer to submit FICO scores. In this case however, the effort might be worth it.

Typically, the Realtor who gets the REO listing will be responsible for evicting anyone who is squatting on the property, re-keying the property, turning on the utilities, adding a lock-box, and bringing the property up to some minimum saleable condition. More often than not, the Realtors will advance these costs out of their own pocket.

The Pipeline

It is extremely difficult to predict how many homes will move completely through the pipeline to the final REO stage. Some owners will "cure" their default, others will manage to sell their properties before the trustee sale. Some of the homes will be sold by the trustee, and what is left will finally become an REO. The whole process can take six to twelve months.

It is not unusual for only 10 or 12 homes out of a 80 or 90 to become REOs. For example, in Aliso Viejo, California in May of 2008, there were 85 short sales, and only 14 REOs. At that time, this was not an unusual ratio.

Are REOs Really A Good Deal?

REOs can be a great deal, but they aren't necessarily so. While the price no longer includes any owner equity, the property may still be priced at or even above the market. On the other side of the coin, REOs priced below the market tend to draw multiple offers. Since Lenders are aren't in the business of managing REO property, the multiple offer scenario is preferable because it tends to drive up the price on a quick sale.

In addition to a possible price discount, REOs (unlike short sales which require lender approval) provide an opportunity to deal with a single owner. REO purchases tend to be straightforward affairs. The caveat here is that the property is virtually always sold on an "AS IS" basis without the benefit of a Transfer Disclosure Statement.

Contact us at mailto:AskMikeyHall@gmail.comif you are interested in Orange County REO properties.

DISCLAIMER

This article is intended to be a general discussion only and a starting point for your own research. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, and is not to be acted on as such, it may not be current, and is subject to change without notice.