CALIFORNIA REAL ESTATE PRIMER – REO Properties

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REO PROPERTIES

The acronym REO stands for the phrase “Real Estate Owned.”  In the real estate trade, an REO is a lender owned property, meaning it has been acquired by the lender as the result of a foreclosure.  In California, this latter fact can be important, because it means  the lender has acquired “clear title” to the property.  This might not be the case if the property was acquired by a Deed in Lieu

Short Sale

In the normal course of events, a distressed home moves through a series of stages which are many times confused by the general public. In the beginning, when the homeowner is trying to sell the home for an amount less than the debt owed on the property it is called a Short Sale.

Foreclosure

Foreclosures begin when the Trustor (borrower) stops making the monthly payments to the Beneficiary (Lender). The first missed payment is a technical default, but in practical terms, most Beneficiaries do not begin the process until the third payment is missed. During this time period the property remains classified as a short sale.

When the owner becomes 90 days late on the mortgage payments, Beneficiaries typically record a Notice of Default (NOD) and the Foreclosure Process begins. The property is now called a Foreclosure and is sometimes typified as “being in Foreclosure”, however it is still a Short Sale.

REO

A trustee sale date is set for about three months after the NOD is recorded. On the sale date, the property is offered for sale at auction. The successful bidder must pay cash for the property. If no one purchases the property, title is transferred to the Beneficiary (Lender) and the property becomes an REO.

The Lender now has title to the property. The Lender will establish a market value for the property, then assign it to an inhouse Asset Manager (generally an outside company) which specializes in the handling of REOs. This company, in turn, will assign the property to a local real estate broker who will list the property for sale on as “AS IS” basis. This means generally there will be no repairs.

It must be remembered that the lender is an owner who has never “lived” in the property. That means there will be very few, if any, disclosures from the Lender. The burden will be on the buyer to determine what’s wrong with the property and how much it’s going to cost to fix it. Moreover, most lenders either use their own purchase contract instead of the CAR approved contract or require their own contract addendum. Many Lenders will also require the buyer to pre-qualify with them, and some will even require the buyer to submit FICO scores. In this case however, the effort might be worth it.

Typically, the Realtor who gets the REO listing will be responsible for evicting anyone who is squatting on the property, re-keying the property, turning on the utilities, adding a lock-box, and bringing the property up to some minimum saleable condition. In variably the REO listing agent will advance these costs out of their own pocket.

For some reason Lendors will habitually assign REO properties to a limited number of Realtors.  While this might be good from a proceedures point of view it can, and many times has, resulted in the concentration of large numbers of REO listings with a single agent.  As the number of REO’s listed with an agent increases, that listing agent’s available time disappears and the entire process becomes mechanized and unresponsive to the buyer.  As a result, REO buyers must be on top of their game.  There will be no listing agent to answer questions, chat up the property or even show it.

The Pipeline

It is extremely difficult to predict how many homes will move completely through the pipeline to the final REO stage. Some owners will “cure” their default, others will manage to sell their properties before the trustee sale. Some of the homes will be sold by the trustee, and what is left will finally become an REO. The whole process can easily take six to twelve months.

It is not unusual for only 10 or 12 homes out of 80 or 90 to become REOs. For example, in Aliso Viejo, California in May of 2008, there were 85 short sales, and only 14 REOs.  At that time, this was not an unusual ratio.  As markets improve and become more healthy, the number of REO listings decreases.  In a healthy real estate market driven by low unemployment the REO listing will become a rarity.

Are REOs Really A Good Deal?

REOs can be a great deal, but they aren’t necessarily so. While the price may no longer include any owner equity, the property may still be priced at, or even above, the market. On the other side of the coin, REOs priced below the market tend to draw multiple offers. Since Lenders are aren’t in the business of managing REO property, the multiple offer scenario is preferable because it tends to drive up the price on a quick sale.

In addition to a possible price discount, REOs (unlike short sales which require lender approval) provide an opportunity to deal with a single owner. REO purchases tend to be straightforward affairs. The caveat here is that the property is virtually always sold on an “AS IS” basis without the benefit of a Transfer Disclosure Statement.  Moreover, in California, the lender is exempt from certain statutory disclosures regarding the property.  If there’s a problem you must find it yourself.

If ever there was a time to use a skilled real estate agent this would be it.

1 Mikey & Pixey Best 1

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DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.