Purchasing Foreclosure Properties
Recently a client asked, "How is buying an REO property different from a traditional purchase?" This is an excellent question and one that we have had many times so we decided to use our response as this issue's topic. I will start with, "What is foreclosure?"
What is foreclosure?
Foreclosure is the process by which the bank gains ownership of the property which secured the mortgage. Once the foreclosure is complete, the bank has ownership and the property is referred to as an REO (Real Estate Owned) property. In Nevada, the title you receive with an REO purchase is the same as a traditional purchase; you receive a clear and marketable title free of liens and encumbrances. However, there are a few practical differences between REO and traditional purchases:
How is buying an REO different from a traditional purchase?
- REO purchases generally require more paperwork than a traditional sale. Some examples include: a bank specific purchase contract, an affidavit stating that you are not employed by the bank that owns the property, the buyer may be required to turn on the utilities in order to perform the due-diligence (which we will take care of for you), etc. None of this is too onerous. We have handled over 100 REO properties.
- You do not receive a Sellers Real Property Disclosure. The Sellers Real Property Disclosure is a "disclosure of the condition and information concerning the property known by the seller which materially affects the value of the property." The bank can not provide such a document because the bank has no personal knowledge of the property. You will generally be required to sign a document stating that you acknowledge the bank has no knowledge of the condition of the property and the property is sold "as is". This has not proven to be a problem since we have an excellent property inspector who can establish the condition of the property. Note that the bank will not make repairs unless there are health or safety issues. An example of a repair most banks would make would include replacing a missing water heater, air conditioner, damaged stairs or broken windows.
How long does it take to purchase an REO?
Two parts to this answer. First, the seller's response time. With traditional sales, the seller usually responds to offers relatively fast, usually hours or days. With a bank owned property, it can take a week or more before they respond. Second, the time it takes to close. Overall REO properties take slightly longer to close. Since the banks choose the cheapest title company they can find, we frequently experienced title caused delays. This is not usually a problem with an investment property.
Can we make a offer lower than the asking price?
Usually, yes. There are occasions when the bank states in the agent-to-agent remarks that they will not consider offers below a certain amount but in general there are no restrictions. You should know that sometimes banks will list the property below market value and it will sell for more than asking price (close to market value). Other times the banks list the property above market value and it will (eventually) sell for less than the asking price (close to market value). REO properties are not necessarily bargains once you take into account the property's condition (like any purchase).
I hope the above provides a reasonable understanding of the difference between buying an REO and a traditional sale. Let us know if you have questions.
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