What is an REO?

With today’s changing Santa Monica real estate market, we are beginning to see not only foreclosures but numerous properties dubbed REO’s as well.  Many times here at RealEstate-SantaMonica.com we are asked “What are they?”  So we thought we’d give a helpful explanation.

The term REO first of all means “Real Estate Owned.”  These homes are very similar to foreclosures…and technically the homes have already been foreclosed upon, but they didn’t sell at a foreclosure auction.  Because the homes didn’t sell at auction, the lender (the bank) became the owner of the property.

As you can well imagine, most banks aren’t interested in hanging on to a large portfolio of these homes because they are not in the real estate business.  Banks just want to make the loans and take their mortgage checks.  That’s why REO’s are potentially good deals for home buyers.

Why buy an REO?

For home buyers thinking about purchasing either a foreclosure or an REO, it’s good to remember that these transactions are a little more complicated than your regular home purchase.

One advantage to buying an REO instead of a foreclosure is that the buyer doesn’t have the pressure of dealing with a home auction.  These tend to be frenzied affairs and sometimes peoples’ emotions get the better of them, and before you know it, you’ve paid more for a home than you wanted.  With an REO, you write an offer just as you would a regular home.

Another plus to buying an REO is that the buyer gets to do a physical inspection.  This is key.  Unless you are a real estate zen master, you do not want to be out there buying homes unless you inspect them.  With an REO you know up front whether something is wrong with the property and you can make an informed purchasing decision.

What should I be wary of when buying an REO?

REO’s can be great deals for home buyers, but some deals really are too good to be true.  So just be mindful of a few things when venturing into one of these purchases. 

First make sure that the property is in acceptable shape.  Get a physical inspection!  We mentioned this above, but it bears mentioning again.  You do not want to be getting a home that appears to be an amazing deal only to find out later that it needs $75,000 in foundation repairs.

Also be mindful of the title.  Make sure the bank gives you a title report so that you know that the bank truly owns the home.  You don’t want any gray area here.

Another heads up…make sure there are no liens on the property.  The bank should be able to field title and lien questions, but it is your responsibility to ask.

Why are REO’s priced to low?

As crazy as it sounds, banks price REO’s to sell quickly because banks are not in the real estate business.  It could be argued that banks at this point should have some brokers working for them full time, but that’s another discussion entirely.

Banks really want to cut their losses and get these homes off of their books as quickly as possible.  The federal government usually penalizes financial institutions for every REO they acquire, so it behooves them to sell these homes fast.  Now banks certainly won’t give the homes away but there are definitely some great deals to be had. 

Should I buy an REO?

Yes and No.  If you are the type of savvy buyer who does his/her homework, REO’s can be an amazing way to go if you want to save money.  However, if you are the type of homeowner who just wants to buy a house as easily as possible, perhaps a more traditional home buying transaction is for you.

So in closing, there are many REO’s out there.  If you are interested, all of us at RealEstate-SantaMonica.com would be happy to help you out.