When someone says that a home or property is "real estate owned" they usually describe it as REO. When someone says REO foreclosures, they are usually discussing properties already through the entire foreclosure and auction process, and back in the hands of the bank or lending company.
So a home that is in the midst of a foreclosure is not an REO property? No, the foreclosure process is a lengthy legal period that usually involves the bank working with the borrower to try to formulate some way in which the foreclosure can be avoided. The bank will then usually offer the property up for auction at the amount due on the loan, and if this is not bid during the auction, the property is then reclaimed by the bank.
Currently, there are hundreds of thousands of active foreclosures, and even more homes in the hands of the banks. Because of this many banks are creating rental agreements with the former owners that allow them to remain in the home, but which makes them aware that they will have to vacate when the property is once again sold.
Now, many people are torn over when to step in a buy a home - when it is in the foreclosure period, or once it becomes one of a bank's REO foreclosures. The answer is difficult to determine, but there are some notable benefits to waiting for the process to be completed and then making an offer.
Even though the home is going to be reassigned with the true market value after the foreclosure comes to a close, the buyer who is willing to wait for this point in time will not have to deal with the legal and emotional difficulties of evicting the former owners from the premises (and this is a very common occurrence).
They will also be able to head into the home with a licensed inspector to ensure that there are no undiscovered or undisclosed issues with the property as well. Often a property in the midst of foreclosure is unable to receive a comprehensive inspection, and this might lead to it being unsuitable for financing without the potential owner paying for such things in advance.
For example, if a home has evidence of a termite invasion at some point in time, most banks will not draft the formal mortgage or purchase agreements until a chemical treatment has been completed. Neither a seller nor a bank is going to be obliged to do this, and so a potential buyer would need to pay for this if they wanted to move forward with the purchase. Of course, this could run into the thousands of dollars, and a home may not be worth such a risk if it is strictly an investment property. Such a thing would only be discovered after a proper inspection.
The final benefit of waiting for the foreclosure period to end before making an offer on any REO foreclosures is that the bank might be more than happy to extend extremely generous terms on the loan, such as a low down payment or low rate of interest, in order to convert it to an income-earning asset on their books.
If you have any questions about REOs or bank owned properties, give me a call or text me at 303-898-9000 or email steve@stevejacobson.com for all of the answers!