Investing in REO properties: Deal or No Deal?

With enormous foreclosure numbers still on the rise, real estate owned (REO) properties, or foreclosure properties that have been repossessed by lenders, are in generous supply. Bank seizures …

With enormous foreclosure numbers still on the rise, real estate owned (REO) properties, or foreclosure properties that have been repossessed by lenders, are in generous supply. Bank seizures climbed 129 percent in March from a year earlier to a nationwide total of 51,393, according to RealtyTrac.

The new wave of REO properties on the market may pique the interest of many investors, particularly those who believe that banks are eager to get rid of them, and as a result, are willing to negotiate to the buyer’s advantage.
But can investors really haggle their way to exceptional deals?

Probably not, according to Walt Harvey, broker associate for East Oahu Realty. From 1992 to 1996, Harvey worked as a listing agent for 14 different lenders and sold nearly 200 REO properties. Out of all of the REO properties he sold, there was only one that he wished he had bought, he said.

“[There is a] misconception that banks want to dump their REOs,” Harvey said. “They don’t.”

“Virtually all the [REO properties] I sold were at market value,” Harvey said.

In reality, banks view their REO properties as an asset, not a liability, according to Harvey. They are charged by charters, shareholders and regulatory agencies to sell their properties for as much as they can–which usually turns out to be near market value.

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And while some bargains might be found in today’s market, REO properties are still not being sold far below market value, according to RealtyTrac.

“I don’t think that REO [properties]…are necessarily a good investment,” Harvey said. “I think people are better off looking for motivated sellers, not banks.”

Nevertheless, investing conditions for REO properties could be improving, especially in markets where foreclosure rates are high. REO properties in Akron, Ohio, for instance, are a buyer’s market, according to local real estate agent David Pontefract.

“[Investors] hold out and try to get them as low as they can,” Pontefract said. “[But] if a property comes up that they believe will sell faster…they would probably pay a little more for it.”

REO properties can offer buyers some unique advantages. Foreclosures owned by banks are usually clear of any liens that may have been recorded against the property, according to RealtyTrac’s website. Additionally, banks may finance the property purchases with favorable terms, such as low down payments and low interest rates.

Finally, “bank-owned properties are usually vacant because the banks have evicted the previous owner, saving the investor or homebuyer time, money and emotional toll involved in the eviction process,” according to RealtyTrac’s website.

Because REO properties are almost always sold “as is,” investors who consider buying REO properties should inspect the premises as thoroughly as possible. Banks are not subject to the same disclosure laws as typical sellers; furthermore, hidden damages are easily overlooked.

Banks normally hire contractors to perform needed maintenance and repairs prior to sale. These contractors, who “have no duty to disclose” observed damages, might paint over defects or put down carpet without checking for termite damage, wood rotting or cracked slabs, Harvey said.

“The so-called good value you think you got may evaporate,” he said.

Therefore, hiring a licensed home inspector is critical. Additionally, talking to neighbors is a good way to learn about distress to the property.

“Neighbors will love to tell you…all the horror stories of what went on at that property,” Harvey said. “You don’t want to find those things out after you bought it.”

Investors should also be prepared for lengthy wait periods, as the negotiation process could potentially take months. Because of the large volume of foreclosure listings to be processed and industry layoffs, loss-mitigation departments have become highly understaffed.


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