Distressed Seller Series, Part 2: Bank Owned, Lender Owned or REO Properties

Distressed Sellers Series, Part 1 addressed Short Sales. Today’s post is Part 2 in the Distressed Seller Series and will focus on Bank Owned, Lender Owned or REO Properties. I will define what these are, outline the sales process for these types of listings, and highlight additional factors to consider when looking at these types of homes to purchase. 

Bank Owned, Lender Owned, or Real Estate Owned (REO) Property Definition: All of these terms are interchangeable and mean the same thing. A bank/lender owns the home and is the seller.

Events that lead to a REO Listing: There are several possible scenarios that could have taken place prior to the lender/bank taking possession of the home. The homeowner may have attempted to sell the home, most likely thru a short sale, and was not successful or they may have decided to do nothing and let the house go to Trustee Sale.  If there was not a successful bid to purchase the home at the Trustee Sale, it is now a bank owned, lender owned, or REO.

THE REO Sale Process:  The seller/bank determines the listing price. The list price is set by the bank based on recent comparable sales (comps) in the neighborhood and/or area and the current condition of the home. A buyer sees the homes, likes it and makes an offer. The offer is submitted to the bank.  If applicable, and this is the case most of the time in Arizona, there will be multiple offers submitted to the bank for review. The bank reviews all of the offers. The bank may accept one offer outright, but typically they will counter ALL offers asking the potential buyer to submit their highest and best offer in order to yield the highest sale price possible and offset some of their loss. At this point the buyer has the option to come back with a higher offer, stick to the original offer price or withdrawal their offer altogether. Typically the bank responds quickly. It is not uncommon to have acceptance by the bank in a few day or within a week.

Additional REO Factors/Conditions to consider:

•  Cash is king in the REO world. If a prospective buyer is planning to obtain financing to purchase a REO property, it is not uncommon for a bank to accept an offer from a cash buyer even if the amount offered is lower than the buyer that is attempting to obtain financing. This enables the bank to close the deal quickly. It also eliminates the financing contingency and the risk that a buyer attempting to obtain financing may be turned down for their loan.
• There are no Seller Property Disclosure Statements (SPDS) or Claim & Loss History (CLUE) report available and no warranties of any kind since the Seller/Bank never lived in or occupied the property.
• The home is sold AS-IS. The buyer can and should perform their due diligence and have inspections but don’t expect the seller/bank to make any repairs. They are already taking a loss and typically will not make any repairs.
• In most cases, the seller/bank will not contribute to the buyer’s closing cost.
• Best case scenario an REO home will be in need of routine maintenance that has been deferred. It is highly likely that it will need major repairs.
• It is not uncommon  for the previous owner to remove refrigerators, stoves, dishwashers, microwaves, sinks, light fixtures, ceiling fans,  AC units, water heaters, water softeners and filtrations systems, etc. prior to vacating the premises.
• If the property has a pool or a spa expect it to be drained or green and most likely in need of maintenance and/or repairs to the structure and/or operating equipment; pumps and filters.
• In addition to the standard Purchase Contract and Addendums, the Seller/Bank will have their own Addendums that will need to be signed by the buyer typically BEFORE your offer is fully accepted. BEWARE: the Seller’s Addendums are written by the Seller to protect the Seller. These Addendums are known to change/alter the terms of the original Purchase Contract. BE SURE TO READ ALL OF THE TERMS OF THE SELLER ADDENDUMS AND BE SURE YOU UNDERSTAND ALL OF THE TERMS PRIOR TO SIGNING ANY SELLER ADDENDUMS.

Still confused or have additional questions? Contact me and I will be happy to share my thoughts, knowledge and expertise on REO’s with you.