You are interested in buying property that your agent says is an REO. What does that mean?
REO is an abbreviation used by lenders, agents and attorneys that means “Real Estate Owned”. Most banks and mortgage companies have an REO portfolio but they want as few properties in that portfolio as possible. This is because lenders do not make money on their REO portfolio. In fact, most of the time, lenders lose money when a property enters their REO portfolio.
Mortgage Companies make money based on the interest payments they receive on the loans they make. Every time you make a mortgage payment, you are paying back part of the principal you borrowed and paying interest on the balance of your loan. When a property enters a lenders real estate owned portfolio it means the owner of the property defaulted on the loan, and the lender foreclosed on the property or accepted a deed in lieu of foreclosure. Therefore, not only does the lender stop making money (the interest payment), but they also stop receiving the principal (the part of the payment that repays the actual loan amount). In addition, when a lender has a property in their real estate owned portfolio, they have to pay commission to a real estate agent to list and help sell the property. They also have to pay taxes, insurance and provide for upkeep of the property.
Therefore, if you are considering buying an REO property, remember these 5 tips:
- The REO owner is the bank or investor for a loan that previously defaulted, and they are losing money every day it sits in their REO portfolio.
- The REO owner will pass title by quitclaim or special warranty deed, meaning they make no guarantees as to the condition of the title to the property or the property itself.
- These properties are usually “AS IS”… or more importantly Buyer Beware. The seller will not make any repairs.
- If your attorney does discover a title defect that causes you to hesitate about moving forward with the purchase, the owner may take steps to cure the defect. However, most REO contracts state that the seller is not required to provide a marketable title, only insurable title. An insurable title means title may not be free and clear of defects but a title insurance company is willing to insure the property for you and deal with a defect if a claim arises against the property.
- REO owners are sticklers for timelines and set dates. These owners usually require documents be submitted to them for review days before closing. So watch your dates and make sure your lender is aware of them.
You can get a good deal when buying a real estate owned property, but it’s important to know the fine details, and by all means, be careful. Watch your timelines, and if a title defect is discovered, discuss it thoroughly with your attorney so you know what complications you may face in the future if you want to sell or refinance the property.
Published by Susan R. Benoit on November 16, 2015