Bank Owned | REO

About Buying Foreclosures / REO’s

Foreclosure is the legal — Issues to watch out for — Is the Price Lower After a Foreclosure?

Broker’s Price Opinion, or BPO
Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. As soon as the bank repossess the property, it is listed on their books as REO – Real Estate Owned – and is categorized as an asset (non-performing).

As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the bank will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker Price Opinion BPO or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide to try for a short sale or to allow it to go through the foreclosure process. If the bank is able to sell the property through a short sale or at a foreclosure auction, then the property will not become a REO property.

After repossession and the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a real estate broker (REALTOR). Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance; however, real estate investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property. Back to Top

Broker’s Price Opinion, or BPO, is a method that a real estate broker (or a sales agent acting on behalf of their employing broker) uses to estimate the probable selling price of a real estate property/house. The estimate of price is submitted in a BPO report (2-3 pages) that includes local and regional real estate market information, neighborhood analysis, and comparable properties (comps) that compare to the house (subject) that is being evaluated. This method of estimating a selling price has similarities to a Certified Market Analysis CMA and a residential real estate appraisal

Foreclosure is the legal and professional proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court ordered termination of a mortgagor’s equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue HOA dues or assessments.

The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust”. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien”. If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment. Back to Top

When a homeowner is behind on his or her mortgage, or already in default, the mortgage holder (aka lender) has many options, including allowing the home to be sold for an amount less than what the home owner currently owes (also called a short sale), and foreclosure.

Buying a short sale or REO property is a complex process. The overview below is intended to give you an idea of what you may face if you decide to pursue a purchase of a distressed property. You should always discuss the process in detail with your REALTOR® before making an offer.

Here is an overview of the most common distressed situations and how you can work through them:

Foreclosure Properties (i.e., REO, HUD, Fannie Mae)

What is a Foreclosure/REO?
If a homeowner has defaulted on the mortgage, the lender has the option of initiating a foreclosure against the property. If the homeowner is unable to pay the past-due payments or sell the home as a traditional sale where the mortgage is paid-off in full, or as a short sale, the foreclosure of home will be complete and the property will be put up for sale at an auction. In the event that there are no bidders at the auction, the lender will end up as the new “owner” of the home. Lender owned properties in this situation are known as REO (Real Estate Owned) properties. Back to Top

Lenders take the homes “as-is,” meaning that REO properties will often need to be repaired. But the benefit of purchasing an REO property is that you may find some good deals!

Buying an REO is similar to buying a short sale except the property is already owned by the lender.

The property was acquired by the lender through a foreclosure action.

Often lenders will sell repossessed homes for less than the past loan balance.

Bank-owned properties are called REOs, meaning real estate owned by the lender.

Issues to watch out for:

• The lender most likely will not agree to make any repairs to the home.

• The lender may require you to financing with them.

• While most REO properties are already vacant, there is a possibility the lender is still in the process of having the former owners evicted. This could result in a delay in closing, and may also increase the price. Back to Top

Is the Price Lower After a Foreclosure?

Whether a buyer should wait for the property to go through foreclosure and be deeded to the bank depends on whether the home has multiple offers. If more than one buyer has submitted an offer, the highest and most qualified offer will most likely win.

If the buyer is the sole offerer and the bank is responding negatively, or worse, not at all, it might be in the buyer’s best interest to wait out the foreclosure. There is also no guarantee that a bank won’t reject multiple offers, too, particularly if none is high enough.

Sometimes banks aren’t reasonable and end up shooting themselves in the foot. I’ve had several listings where banks refused to accept short sale offers only to get title to the home through foreclosure, which then ultimately sold for tens of thousands less.

Don’t get discouraged if the bank rejects your short sale offer. Be smart. Laugh all the way to your bank.

If no one else submits a higher offer — and if you didn’t, why would anybody else? — eventually the bank will put the home up for sale as an REO. Watch for it to reappear on the market as a bank-owned home. If the price is reasonable at that point, buy it from the bank. At least buyers of bank-owned homes are relatively assured their transactions will close within 30 days or so, and most likely at a much lower price.