REOs – Profit Opportunity or Prescription for Frustration?

By Raymond Stoklosa · February 23rd, 2009

Lately I’ve been reading more and more media reports that great bargains can be had purchasing bank owned homes known in the real estate business as REO (real estate owned) properties, and how easy it is. While it is true you can get great bargains purchasing bank owned properties, it is not always easy. There are many things to watch out for that I have learned in my 30 plus years of experience in the San Mateo County real estate market.

What is an REO?

An REO is categorized as a post-foreclosure sale. The home owner/borrower has defaulted on their loan and the bank (lender) has acquired ownership to the property as a result of the foreclosure process. Usually then, the bank lists the property with a real estate broker who is responsible to manage, market and solicit offers for the property through the typical channels, such as, MLS and real estate websites.

Who is Involved in an REO sale?

There are several parties involved in selling a bank owned property that are not involved in the traditional home purchase. The most critical is the asset manager who has been hired by the bank to dispose of the property profitably. The asset manager must justify the sale through various levels of bureaucracy which is almost always a challenge.

Is Buying an REO for Beginners?

Purchasing an REO is not for beginners The transaction is fraught with details and necessitates constant follow-up. Often it seems like the left hand doesn’t know what the right hand is doing. Here are some tips:

Be polite and patient. Banks and their asset managers are swamped with sometimes thousands of properties in their portfolio they must manage and sell. Often they are understaffed and overworked. Remember they are human beings who can easily ignore your file if you disrespect them.
Use a Buyer’s Agent. Work with an experienced real estate buyer’s agent. Buying an REO requires a special set of skills, an intimate understanding of the real estate contract, attention to detail and persistent follow up…usually every 2-3 days.
Recognize the process. Banks have an operational manual, various levels of authority and supervision. Employees have strict job descriptions and rarely deviate from the rule book. Finally, they have to justify the net proceeds of every offer to an executive committee. If the numbers work, they will usually move forward. It is not at all emotional as it is for the traditional home owner.
Get a sales history. Almost every REO has been on the market in the past usually at a higher price and didn’t sell. The longer a home has been on the market, the more shop worn it becomes.
Determine the comparable homes sold and pending. Ask your buyer’s agent to prepare a market analysis of similar homes sold, pending sale and expired listings in the vicinity over the previous four months. Real estate markets are local and in constant flux. Defend your offer with facts.
Write a clean offer. Use contingencies wisely and well. Don’t hold up on the weasel clauses like choosing the title company as they will sabotage your offer. Contingency periods should be short, specific and used only to protect yourself from serious deal killers.
Submit a genuine pre-approval letter. Be sure your lender, if you need one, writes a strong commitment letter clearly demonstrating your credit worthiness.
Understand the local market demand. Be sure your buyer’s agent asks the asset manager if other offers have been submitted and how many. Some markets, such as Sacramento, are tremendously active with multiple offers typically from investors seeing profit opportunity. The average number of days on market is an excellent indicator of market strength. An experienced, knowledgeable buyer’s agent will help you understand the meaning of that number.
Follow the rules. Banks have prescribed procedures for selling their properties. Submit complete offer packages – never piecemeal – and use the forms they prefer. Failure to do so is a prescription for failure.

If you would like an updated list of the REO and Short Sale (pre-foreclosure) properties for sale in San Mateo County, visit San Mateo Homes Info and click on the “Best Deals List” tab. Want this list emailed to you regularly? Send us an email and we will get it over to you. In Santa Clara County? Head over to Santa Clara Homes Info for your complete, updated list of foreclosure and pre-foreclosure properties.

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