First off let me get some vocabulary straight. A banked-owned home is very commonly called an REO (Real Estate Owned, the bank's vocabulary since it is real estate they own). These words are often used interchangeably and that is ok. You may also hear these properties called "foreclosures". All these terms are referring to the same thing. A "pre"-foreclosure may be on the market as a short sale.
How does a home get foreclosed on? Read about the foreclosure process here if you are interested since this post will not be cover the process of how a seller gets there.
There are several differences an experienced home buyer will note with an REO compared to a standard sale. There is also additional risks that are taken with the idea that the overall payoff or reward is to get the home at better than market value. I cover both these topics below.
First let's talk about how an REO purchase is different from a standard sale.
1. When you first drive-up to an REO you will note that the home is likely suffering from some deferred maintenance, this includes landscaping (maybe even something as simple as watering the yard) through major subfloor damage due to leaking pipes or bathroom joints. There can be a large variety, but it is almost guarantee there is some deferred maintenance. To correct this deferred maintenance, it may require $10,000 to get the home "habitable". Don't have this cash after buying the home, there is a special loan option.
2. The home is not "Staged" or prepared for sale. If you like walking through "pretty" houses, then foreclosure home-buying may not be to your liking. It is typical for the home to not be very clean and in some cases it can be very dirty.
3. Some REOs have odd additions or home-owner fixes that might not be permitted or even to building code.
4. Depending on the asset manager, the Close of escrow may be longer than you want or expect, possibly 45 days, but there are also cases where if you have cash, you can close in 10 days!
5. The escrow company is very likely to be out of the area which means it is more difficult for you and your agent to get ahold of and deal with them. This also means you will have to sign loan paperwork and other escrow documents with a notary who is not familiar with the particular transaction.
6. Lastly, be aware that in Santa Clara County, many low-end REOs (those under $500,000) are multiple offers and so you as a buyer have competition to worry about too.
What additional risks does a buyer take?
1. The home must be purchased as-is. Therefore your initial offer price must reflect the work to be done.
2. Banks do not renegotiate once in contract, so if anything new and expensive is discovered, your likely option is to deal with it or back out of the contract.
3. There are most likely no inspections completed upfront, so not only do you have to pay for these, but you must base your offer price on minimal information.
With all the listed differences, remember the goal of buying an REO is to get a good price on bay area real estate. So depending on your personal goals, a REO could be worth the extra steps and risks.
Have you had an REO experience that is not covered in the list above? Are there any other areas your have questions about?
