05.03.10, 08:22 AM EST
REO or real estate owned properties, which are commonly referred to as "foreclosures," have been getting an unfair reputation in the media and within the real estate community for some time. REO properties can be a great deal for homeowners that want to have their piece of the American dream.
The first misconception that many people have is that the bank is selling the house and they are not part of the real estate industry. This may have been true fifteen years ago, but due to the increase in foreclosures banks have had to keep up with the times. Banks often outsource the function of re-selling properties to asset management companies that have better resources and the necessary skills to facilitate the transaction. In addition, even the banks that still "in-house" this function have a completely separate department consisting of skilled asset managers with experience in real estate negotiations.
The second misconception is fueled by the first: that the bank will take any offer to get rid of a "toxic" asset. Every asset undergoes a strenuous process to determine the value, including but not limited to appraisals, bpo's (broker price opinion), and various outside resources. Even when potential buyers submit low ball offers, they can expect an aggressive counter offer. Comparables in the area are used to help determine the value of the REO and the properties are usually priced competitively with the area, but not under-priced. The majority of properties are rarely sold for .30 cents on the dollar.
A third misconception is pertaining to inspections. Banks do allow inspections of REO properties. This is the best way for buyers to know what is going on beneath the surface of any potential home. Inspections are paid for by the buyer. Sellers generally do not pay for a buyer's inspection report since the inspection becomes the buyer's property and cannot be used by the seller. Inspections are encouraged so all buyers will know what they are committing themselves to for the next 15 to 30 years.
A fourth misconception is that purchasing an REO property will take longer than buying a non-REO property. Time is of the essence in every real estate transaction, and buying an REO property is no different. In working with REO's time is measured in days, not weeks or months and every additional day it takes to list, sell or close an asset is a mark against the agent and asset manager. The majority of outsourced asset management companies are measured by the length of time it takes to list a property and respond to offers and therefore is taken very seriously. When activity on a property is generated all parties seek to respond to an offer or request as soon as it is received. With technology as fast as it is now, that can be a matter of hours and not days.
The last misconception about REO properties is quality. Generally buyers are under the misconception that there is something "wrong" with a property that has been foreclosed. This could not be further from the truth. Properties may have aesthetic challenges but there are just as many retail homes that have the same issues. When properties are listed on the market by an asset management company they review every possible strategy to sell a home. That could be a major plus for potential buyers if the property is marketed as "repaired". Generally this means that new paint, new carpet and other upgrades have been completed in the property. So not only are the properties not damaged but in many instances there have been repairs completed to make the property stand out from the competition.
According to CAR (California Association of Realtors) over half of all first-time buyers(51.3%) either bought a REO property or a short sale in 2009. While the share of first time buyers surged from 35.9% in 2008 to 47% in 2009. This growth shows that rising foreclosure numbers are directly affecting the amount of first time buyers being able to purchase. According to NAR's 2008 Report, 4 out of 10 buyers considered properties in foreclosure, which resulted in 6% of recent home buyers purchasing REO over 1% in past years.
Many buyers want REO properties at 20-30% below the market. This expectation of purchasing a "cheap" property is fueled by the national media sensationalizing what is occurring in very extreme cases. However, according to the NAR's RCI, most REO's are selling at a 16% discount, and this discount has been steadily decreasing since the first quarter of 2009.
REO properties have become an ideal opportunity for buyers to purchase a house that they might not have been able to afford in the past. There are some negative connotations and misconceptions surrounding REO properties and the process by which they become available but that does not lessen the fact that there is a good deal to be found if you know what you are purchasing.
