Are all REO or Foreclosed Properties Good
Deals?
EXECUTIVE SUMMARY:
In today’s
market and all local and national real estate market
news that talk about so many existing and upcoming
foreclosures and short sales are coming in the
market nationwide, everybody is looking for a “Good
Deal”. But, honestly most of the buyers don’t know
what exactly they mean by “Good Deal”. Many think
because of all news about numbers and low prices of
foreclosures in some part of country such as
California, Nevada, Michigan, Florida, they can get
the same deal in other part of country, e.g., 20-50
cents for each dollar.
Nationwide
foreclosed transactions accounted for 33%, 25% for
years 2011 and 2012 respectively. This number is
projected to be around 15% in year 2013 nationwide.
Both the
number of projected of foreclosed properties and
expected 20-50 Cents for a dollar for purchase price
are not reasonable for most part of the country,
especially in Collin County Texas for cities such as
Plano, Frisco, Prosper,
and surrounding areas, which have
been identified as one of the healthiest real estate
market in the nation. In many parts of these cities
and surrounding areas, we don’t see that huge number
of foreclosed or short sale properties and not only
prices have not been dropped, some have been
increased a lot in last couple of years.
Many buyers
and investors in my area think foreclosures are
ALL “Good Deals” and they can purchased
them very cheap (e.g., 20-50 cents for each dollar
or so), repair it (if necessarily), and they still
be ahead about 40-50% of the purchasing of a regular
sale!
This article
tries to identify and inform the buyer of
differences between when purchasing a foreclosed (REO)
property and when purchasing a regular or
non-foreclosed property. This hopefully provides
enough information to a buyer to make a better and
educated decision. Remember, it will
require a patient and informed Buyer to have a
transaction close successfully.

Now,
let’s go back to our original question:
Are REO
(Foreclosed) Properties “Good Deal”?
There is
no absolute answer YES or NO for this question that
can be hold true for all foreclosure transactions.
Each foreclosure sale is different and requires a
lot of details to be handled when buying a
foreclosed (REO) property. One thing is for sure,
not all foreclosure Properties are good deals nor
are all bad deals.
Depending on many factors such as those shown below,
purchasing an REO property may or may not turn out
to be a “Good Deal”.
·
Definition and expectation of a “Good Deal” for each
Purchaser and
·
Total
purchase cost, and
·
Additional costs (e.g., closing cost, repair cost,
etc), and
·
Condition of the property, and
·
Repairs
types/costs and
·
Time
takes to bring the property in a move-in condition
and the
·
Purchaser’s expectation & tolerance (e.g., expect
30% lower than a comparable regular sale, is he/she
patient and willing to wait longer time to get
responses back from the bank, is he/she informed and
knows about all differences, etc),
·
If you
expect your home to be completely nice, clean,
move-in ready, a foreclosure property may not be for
you.
·
If you
expect to move-in quickly or get quick responses
(e.g., within a couple of days), a foreclosure
property may not be for you.
·
If you
expect the Seller to make major or cosmetic repairs
before you move-in, a foreclosure property may not
be for you.
·
Etc.
Of
course the purchaser’s expect to purchase that
foreclosed property with such a good (low) price
that he/she would be ahead of the game considering
all additional costs, times, and inconveniences that
he/she might incur.
Definitions: REO or Foreclosed Properties:

First,
let’s define what exactly an REO or foreclosed
property means:
When the
property is not sold in the auction at the court
step, as described in the article
foreclosure Process,
it goes back to the lender, and if that lender is a
mortgage company/bank it becomes known as REO (Real
Estate Owned - by the bank) property. Based on some
historical data and observations, only about 3%-5%
of all scheduled auctioned properties are sold to
the audiences at the court step of the Counties
(e.g., in Collin County of Texas). This means, more
than 95% of those properties go back to their
respective lenders or banks.
Please note that this article explains advantages
and disadvantages of an REO Foreclosure (after the
bank repossesses the property). For Foreclosure
buying Process at the court steps in Texas, please
visit
http://www.TexasFiveStarRealty.com/Foreclosure_Conduct_of_Sale_in_Texas.asp
For the
most up-to-date list of REOs foreclosure in North
Texas please visit
http://www.texasfivestarrealty.com/List_of_Foreclosures.asp
DETAILS OF THE DIFFERENCES WHEN PURCHASING AN REO
PROPERTY AND PURCHASING A REGULAR (NON-FORECLOSED)
PROPERTY:
Disclaimer:
Not all
items specified here should negatively impact your
decision to purchase an REO property nor applicable
for all banks.
However, it is a good idea that each purchaser go
through this “differences” list and put a $ value
for each item (if applicable), then add all those
values to the purchase cost to come up with a
comparable total cost and figure out whether or not
that particular deal is “Good Deal” or not.
Each foreclosure sale is different
and requires a lot of details to be handled when
buying a foreclosed (REO) property. Consult with
your real estate agent and/or your real estate
attorney for questions regarding purchasing a
foreclosed property.
DIFFERENCES:
In most
parts, purchasing a foreclosed (REO) property
and the process of offering, counter-offering
and negotiations will be somehow different than
regular (non-foreclosed) sales. There are many
lender’s specific rules and requirements that
require purchaser to follow.
Please
note that following is a summary list of differences
that I have collected during my years of experiences
in real estate and I believe the REO purchasers must
be aware of them. This list should be used as an
educational and for informational purposes only and
may not be complete.

Please
note that below is a summary list of differences
without explanation here due to the size. For more
information and detail explanation of each item
please visit
http://www.texasfivestarrealty.com/Foreclosure_Things_You_Should_Know.asp
Due to
the size of these explanations, they are defined in
above web page.
For
example; Banks may require:
1.
Pre-approval or pre-qualification letter from
a specific lender,
2.
To use Bank's preferred Title company,
3.
To use bank's own forms and addendums in
addition to or replacement of the standard forms.
4.
Property Tax Proration.
5.
Prior Year’s Exemptions.
6.
No Seller Disclosure Notice is required.
7.
Property is usually sold “AS IS” Condition,
8.
No Warranty, If Repairs done by Bank:
9.
Additional expenses to Buyer due to fixing
and repairing.
10.
Loss of Time and Money During the time to
make the house move-in ready.
11.
Bank usually takes longer time than regular
sale to respond.
12.
Multi-Offer Situation,
13.
To submit offers online through their
websites,
14.
No Option Period and No Unrestricted Rights,
15.
Utilities may not be turned on.
16.
Inspection Periods and Limitations.
17.
Non-Negotiable exact pre-defined amount for
earnest money.
18.
Owner Occupancy Certificate may be required.
19.
Special Warranty Deed Instead of General
Warranty Deed
20.
Limited Seller Closing Cost Contributions
21.
Waivers of Buyers Rights
22.
Seller's Sole Discretion
23.
Non-Timely Negotiations Responses Back from
Bank
24.
Non-Guaranty Acceptance of Contract or
Counter-Offer
25.
Late Fee Charges and Choosing the Realistic
Closing Date
CONCLUSIONS:
There is no absolute answer YES or NO for this
question that can be hold true for all foreclosure
transactions. Each foreclosure sale is different and
requires a lot of details to be handled when buying
a foreclosed (REO) property. One thing is for sure,
not all foreclosure properties are "Good Deals" nor
are all "Bad Deals".
Depending on many factors such as those explained
earlier, purchasing an REO property may or may not
turn out to be a “Good Deal”.
Also, there are many other
regular sale properties in the market that could be
"Better Deal" than REO or foreclosed deals and
should be considered in your search of "Good Deals".
There
are many differences when purchasing an REO
(foreclosed) property. Though, not all of them
should negatively impact your decision, but you need
to be informed and be aware of them. It will
require a patient and informed Buyer to have a
transaction close successfully.
-
If you
expect your home to be completely nice, clean,
move-in ready, a foreclosure property may not be for
you.
-
If you
expect to move-in quickly or get quick responses
(e.g., within one or two days), a foreclosure
property may not be for you.
-
If you
expect the Seller to make major or cosmetic repairs
before you move-in, a foreclosure property may not
be for you.
-
If you have time to wait a longer time and don’t
mind to repair/fix problems yourself or deal
with contractors to repair/fix problems for you
to bring the foreclosed home to a move-in ready
house and you have reasonable expectation such
as 10%-15% below the market of comparable house,
then a foreclosure property may be for you.
Each
foreclosure sale is different and requires a lot of
details to be handled when buying a foreclosed (REO)
property. Consult with your real estate agent and/or
your real estate attorney for questions regarding
purchasing an REO or foreclosed property.
For more
information on Foreclosure Process and purchasing
foreclosed (REO) property, please visit
http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp
For a
current list of foreclosed (REO) properties in North
Texas, please visit
http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp
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