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UNDERSTANDING REO'S AND FORECLOSURES
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FORECLOSURE:
It is a procedure by law; where as "real-property" (the home) is held as security for re-payment of a debt (the mortgage) and is sold to pay the debt in the event of default. If the borrower defaults, the lender can begin the action of foreclosure. Note: Laws and foreclosures vary from State to State.
REO (Real Estate Owned)
After the Foreclosure action is complete, the ownership of the home reverts back to the bank or lender. The home was used as collateral for a loan (debt) and now becomes a Bank/Lender asset. This asset is referred to as "Real Estate Owned" (REO). Foreclosures/REO Departments can be found in Banks, Outsource Companies, Mortgage Companies & Servicers. They are referred to in many different ways.
| O. R.E.O. Dept |
Property Disposition |
| Default Division |
Asset Liquidation |
| Asset Management |
Non-Performing |
| Property Preservation |
Property Acquisition |
UNDERSTAND THE SELLER & THE REO PROPERTY:
SELLER: (Banks & Lender's)
They are in the money lending business, not the Real Estate business. Their primary concern is resolving these matters. There is no personal relationship between a lender and the property. They have never lived in and most times have never physically seen the home. It's an asset to liquidate not a personal transaction.
REO PROPERTIES
A) Sold "AS-IS" which means just that! They offer no warranties, guarantees or representation. They have never lived in the house.
B) Most banks offer "clean" title at closing however, that does not mean clear "CO" issues, or functional utilities so pay attention to converted rooms, extensions, decks as well as heating, plumbing & electrical. Notify your mortgage person as to the condition of the property in advance.
C) Most Sellers (Banks) in their written contracts require that the buyers pay "transfer tax" at closing. Rarely this is a negotiable point. Note: Fannie Mae, Freddie Mac, SONY Mae, and Veterans Administrative are examples of institutions that are tax exempt.
D) We encourage all buyers to do inspections to satisfy any concerns or questions you may have during the purchase process. However, The AS-IS clause will not change based on the results.
MYTH VS FACT
1) Myth: The Bank/Lender wants to sell their foreclosed properties at "rock bottom" prices.
Fact: The Bank/Lender are in the financial business and are looking to recapture any and all loss. As a result fair market value is always the objective.
2) Myth: The Bank/Lender are only looking for the Mortgage amount owed at foreclosure.
Fact:
The amount owed may not reflect items such as the principle & interests, late fee's, Attorney Fee's, Insurance, Property tax and Preservation Issues etc. Whether profit or lose, the Bank/Lender is looking for "Fair Market Value" which is determined from local professionals.
3) Myth:
The Bank/Lender will fix up my house so it's up to code and functional.
Fact:
The Bank/Lender sells all REO properties in AS-IS condition. IF they do participate in completing any kind of work it would be determined prior to negotiating, never after.
4) Myth:
The Bank/Lender will finance my REO property directly.
Fact:
Very few lenders are set up to offer REO financing. If financing or incentives are offered it is normally brought to the buyer's attention immediately.
5) Myth:
If I pay cash, the bank will give me a better deal.
Fact:
Cash doesn't mean discount. Cash or mortgage; the Bank/Lender will realize the same net proceeds.
WHAT IS FAIR MARKET VALUE/HOW IS IT DETERMINED?
The Bank/Lender normally hires 2 local professionals. The first, a Real Estate Broker and the second a Certified Appraiser. Extensive reports are done and interior, exterior and neighborhood photos are taken. We are required to give two values. As Is and Repaired.
1) "As Is" value - what you see is what you get. Buying it exactly As it Is; without investing any money into its present condition.
2) Repaired Value - is determined by estimating what updating, improvements, cosmetic and structural repairs would bring the home up to a good or excellent condition (such as: new roof or windows, paint, carpet, updating electrical & heating etc.)
Also what's taken into consideration is location, neighborhood surroundings, and view. For example: if the home looks at a gas station or has a swamp next door, the value would reflect these observations.
Banks/Lenders are no different than other sellers. Like you, they want the best terms, which includes purchase price, closing time frame and eligibility of financing, etc.
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