The bursting of the housing market bubble during the most recent economic downtown gave rise to renewed interest in purchasing foreclosures and real-estate owned (REO) properties, even as the market recovered. While these circumstances can offer some advantages to buyers and investors, it's important to understand the possible challenges they can bring to the real estate process as well. We can help you through the sometimes complicated process of purchasing a foreclosed or REO property.
To determine whether a foreclosed or REO property might offer the right opportunity for you, begin with an understanding of what causes a property to become foreclosed on or revert to a real-estate owned property in the first place.
Most people have a fairly good idea what is meant by a foreclosed property, but the term REO is not quite as commonplace outside real estate industry circles.
There are several types of foreclosure, but in its most straightforward terms, a foreclosure comes about when a mortgage lender exercises his or her legal right to repossess a property put up as security for a mortgage loan after a borrower has failed to make payments as promised.
The mortgage lender goes through a legal process—either court-ordered or statutory—to terminate a borrower's equitable right of redemption, which refers to a defaulted property owner's right to recover the property prior to its sale by bringing the account up to date and paying any appropriate fees or charges.
A property can also be seized due to action by other lien holders, such as unpaid contractors' bills, overdue homeowner association dues or overdue taxes.
The foreclosure process allows the lender or creditor to sell the foreclosed property to pay off the defaulted loan and any other encumbrances. If a foreclosed property fails to sell to a third party at auction, property ownership reverts back to the lender and it is then labeled a real-estate owned, or REO, property. Banks and other lenders consider REOs to be a liability, and are often anxious to sell.
Foreclosed properties move along a timeline, from pre-foreclosure to auction to REO stages, depending on when the property sells. Your advantages shift with each stage. If you are looking at a property in pre-foreclosure, you are looking at what is known as a short sale.
You can also get personal satisfaction out of helping someone to avoid foreclosure and more serious financial consequences when you purchase a short sale property.
Once a property has moved beyond the pre-foreclosure stage, it goes to auction and is sold to the highest bidder. If you are interested in a home that is being auctioned, you can expect major discounts from market price in many cases, but this is often because a property is in a state of disrepair and neglect.
If a home does not sell at auction, the property reverts back to an REO, with a whole new set of advantages.
One of the main reasons for considering purchase of a bank-owned property is that the lender is often open to allowing a prospective buyer negotiate the price to a fraction of market value, often from 20 to 40 percent lower than it might otherwise bring. This can help you build equity in a new home quickly, allowing you to trade up to a higher-value property in a shorter period of time, if desired.
Frequently, the lender's loss mitigation department will also be open to negotiating a new loan with favorable lending rates below market rates. You may also be able to negotiate with the lending institution owning the property to have them pay all or some of the closing costs.
Another reason you may want to consider an REO property is that It also comes without any liens or other encumbrances. That's because they have already been expunged by the lender previously. Anything hindering a clear and clean title—taxes, second or third mortgage, mechanics' liens or any other lien attached by creditors—have been addressed in most cases.
Depending on your desired geographical area, you can often find a number of available properties in some stage of foreclosure to fit a variety of needs.
A foreclosed or REO property can be a great value for investors and home owners alike, but this special category of properties isn't without its challenges, either.
One challenge is that the real estate transaction process itself often takes longer than it does with non-REO properties, beginning with acceptance of the offer to purchase. This can be particularly troublesome for buyers who have an urgent need to move or become stressed over passing up other properties in the hopes of winning a home in foreclosure.
Challenges can also arise due to the stage of foreclosure. Until a property reaches the REO stage, there could be liens attached. You could end up buying a foreclosed property at auction only to find that the real estate taxes are woefully behind and you are at risk of local treasury officials seizing your new home if the back taxes are not paid off in a timely fashion.
Another drawback to targeting foreclosed properties is that not all REO properties are available to the general public since some lenders prefer to sell multiple REOs to investors seeking million dollar real estate portfolios. This allows the bank to move hundreds of properties, while investors build a sizable real estate investment portfolio in just a short amount of time.
If you are interested in targeting foreclosed properties, share your needs with us and we will guide you through the process. There are a number of web-based services that allow you to search for foreclosed properties, usually for a fee. Lenders themselves can also sometimes provide a list of REOs. However, the task can be daunting and unfortunately, there are unscrupulous people out there willing to charge you for a service that leaves you with outdated information or listings that are lacking.
Rather than trying to search for REOs and foreclosures yourself, our agents can help to locate just the right property for you. Contact Us today about your interest in REOs or foreclosed properties, and we will show you available properties and guide you through the process.
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