“After the home inspection and the appraisal, the buyers found out that the house needed repairs. The current owner didn’t want to do the repairs and my clients didn’t want the added expense, so the purchase fell through. Now the buyers are looking for another house in the same area.” As a result of complications like these, as well as involvement from the lending bank, the short sale process tends to be lengthy. It can add weeks or even months to a purchase.
If a short sale doesn’t work, don’t despair. You can probably get a better deal buying from the lender after it has foreclosed on a home. In the language of real estate, such homes are “REO”: Real Estate Owned by a bank or another lender. “At least half of the sales I see now are REO homes,” says Carradine, who is also the founder and CEO of BlackRealEstate.com. For example, the house Sloan and Saunders purchased was an REO house. “The bank put the house on the market for around $220,000,” says Sloan. “I guess there were no acceptable buyers at that price, so the bank lowered the price and lowered it again.” Finally, when the price came down to $179,000, Sloan and Saunders put in a bid, which the bank accepted.
Rewards of REO
Buying an REO home requires some patience, but it also has advantages, according to Marvin E. Katz of Ben-Ezra & Katz P.A., a law firm and real estate title company in Fort Lauderdale, Florida. “If you purchase after the foreclosure sale as an REO, you can buy the home free of title liens and other claims,” says Katz. “Lenders, as part of the REO process, will eliminate all liens, judgments, and delinquent taxes. That includes any outstanding homeowners’ association or condo liens.”
When you purchase a property at a foreclosure sale, Katz points out, you might not have had an opportunity to inspect the property. “However, if you purchase an REO home, it can be inspected prior to the contract for purchase and sale or as part of the contract giving buyers the ability to back out of the contract based upon the results of the inspection report.
Typically, the bank will have placed the property in a readily salable condition,” says Katz. He adds that depending on the condition of the property, buyers may be able to negotiate a reduced purchase price by assuming the repairs.
With all of these advantages, what’s the downside of buying an REO property? “You usually are purchasing the property in ‘as is’ condition,” says Katz.
“This means that you accepted the inspection report on the physical condition of the property and are willing to assume the risks of purchasing such a property in that condition. Therefore, you will need to know the cost to place it in move-in condition.” He suggests that REO buyers make sure the contract is contingent on allowing the buyer to cancel the contract for any reason if he or she is not satisfied with the results of the inspection. And if necessary, there should be a financing contingency allowing you to cancel within a reasonable time without losing your down payment/escrow deposit.
If the advantages of buying an REO home seem to outweigh the drawbacks, how should you proceed? “Work with the listing realtor, the one who represents the banks,” says Katz. “The listing realtors not only have more access to properties, they are in the best position to move the deal along. Both the realtor with a glut of foreclosures, and the bank, are motivated to sell. Let them know to contact you in the future if the bank needs to quickly unload foreclosure properties.”