On the Road to REO's (Bank-Owned Properties)

Real Estate Agent with Coldwell Banker Kivett Teeters

As published in the February 28th, 2008 edition of the Yucaipa News Mirror

On the Road to REO's (Bank-Owned Properties)

Special to the News Mirror by Randy Fox

No doubt you are aware of the recent downward turn in the California real estate market in the past months. This trend has left the current real estate market with a large inventory of properties at reduced prices, many of which are bank-owned (REO or Real Estate Owned), also known as foreclosed or repo properties.

Why the current influx of so many bank-owned properties? A lot of it stems from the loan industry crisis. During the "peak" of the real estate market, home owners who were otherwise unable to afford to purchase a home, did not have a down payment, did not have the income to make a large monthly house payment, and/or had questionable credit were offered "creative" financing terms from lenders eager to lend money.

Adjustable-rate mortgages, known as ARMs, were especially prevalent in the sub-prime market. They are considered higher-risk loans because they typically draw borrowers in with an initial low "teaser" interest rate, which can spike upward after the first few years.

When an ARM (usually with a two-year term) matures, the monthly payment skyrockets. Those who were struggling to make their ARM payments before they matured were now found themselves facing payments that jumped hundreds of dollars a month.

For example, a homeowner who takes out a $200,000 ARM with a teaser rate of 4 percent initially pays $954.83 monthly in principal and interest. But when the interest rate jumps to 7 percent, say, in the second year of the mortgage, the payment rises to $1,320.59 a month - a move that regulators call "payment shock." Change that figure from a $200,000 home to $300,000, $400,000 or more, and you can see how quickly payments can get unmanageable.

What does this mean to you? Why would you want to look into purchasing a REO, foreclosed, HUD or short sale property? The number one reason is simple - the possibility of getting more value for your money.   


REO stands for "Real Estate Owned". These are properties that have gone through the foreclosure process and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. 

When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process.  You must also be prepared to pay with cash in hand.  And on top of all that, you'll receive the property 100% "as is". That could include existing liens and even current occupants that need to be evicted. 

A REO, by contrast, is a much "cleaner" and attractive transaction.  The REO property did not find a buyer during foreclosure auction.  The bank now owns it.  The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. 

Do be aware that REO's may be exempt from normal disclosure requirements.  In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of; in other words, just like the foreclosed property, the REO property is sold "as is". This is where you need to make sure to have the home inspected by a licensed professional home inspector to make sure there are no issues with the house that could cause you problems later.

Most buyers assume that any REO must be a bargain and an opportunity for easy money. This simply isn't true. You have to be very careful about buying a REO if your intent is to make money off of it. While it's true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. 

When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. 

The bargains with money-making potential exist, and many people do very well buying REO's.  But there are also many REO's that are not good buys and not likely to turn a profit. This is where you have to do your homework to make sure the property you are interested in fits your needs and your ability to make all necessary repairs. This is where a qualified Realtor® can help you find the necessary information needed to make an informed and educated decision.

Randy Fox is a residential and commercial real estate agent with Century 21 Best Properties in Yucaipa. He can be reached by phone at (909) 965-2937 or email at randy.fox@century21.com. He also has a website; www.yucaipaproperties.net.




Comments (2)

Michelle Way
AVALAR Pro Realty - Jackson, MS
How do I get started in the REO business
Mar 05, 2008 05:18 PM
Randy Fox
Coldwell Banker Kivett Teeters - Yucaipa, CA

Hi Michelle,

At this point in the game in the current market, it's probably going to be difficult for you to get into the REO business. Seasoned agents who are "in the know" and have been through the ups & downs of the cyclical market get into the REO aspect of the business as soon as they see the turn in the market coming, if not before. That doesn't leave much business out there for the rest of us; that's not to say that you can't gain REO business, you just have to be persistant, write down a plan of attack and stick to it. Like anything else in the real estate business, consistantcy is the name of the game; like anything else, it's a numbers game.

Most larger lenders who own REO's like to use agents who have experience in dealing with REO's. I would suggest contacting smaller banks & credit unions in your area; do this by sending them a letter stating your interest and how you can help them. Stating any experience that either you or your brokerage has with dealing with REO's will be extremely beneficial as well. Follow up on the letters two weeks after sending them by phone; this will give the letter time to circulate to the proper person who is responsible for assigning REO property to agents to list for them.

Lenders are inudated with letters from Realtors wanting to represent their REO's; a follow up phone call is another story. And the follow up call is probably more important than the intial letter; the phone call shows the lender you are serious and shows them you have follow up skills and that you're not just another 'fly by night" agent. Just tell them who you are and that you're following up on the letter you sent; that way if they say they didn't get it, you can again tell them who you are and what you can do for them. I find that sending letters "breaks the ice"; that way your phone call won't be a cold call as you've already initiated contact with them with your letter.

Also, read as much as you can on REO procedures and become as knowledgable as you can; REO transactions differ from a "regular" transaction so you need to be aware of the differences; i.e. disclosures, bank addendums, etc. I'm sure there are some good posts in ActiveRain explaining REO's, and just type in REO into Google and all kinds of information will come up.

I hope this helps; I'd love to hear your success stories! Good luck Michelle; feel free to contact me with any questions.  Randy

Mar 06, 2008 05:37 AM