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Last Updated: May 14th, 2012 - 22:24:01 |
Real Estate Owned (REO) is the real estate used as collateral for loans that have foreclosed. The ownership of the property itself has reverted to the bank, insurance company, or individual lender. In this article, you will learn:
- How REO sales take place
- How to buy from the banks
- Who holds the REO
- Where the best deals are
- How to buy at IRS sales
- How to buy at state tax sales
- The details of the judicial foreclosure sale process
THE PROCESS OF SELLING REO
REO have advantages and disadvantages for the foreclosure buyers. The big advantage in buying REO from the bank is that the lender has the ability to restructure the loan with favorable terms, lower interest rates, and long payment schedules. It is also possible to negotiate low down payments of approximately 5 to 10 percent, and bargain for a waiver of points and fees. There is a good possibility that the lender will even offer a discounted purchase price. But none of these advantages is guaranteed. The disadvantage is that if no member of the public bids at the Trustee’s / Sheriff’s Sale, the lender may have lent too much on the property or the property might be losing value for some other reason.
The foreclosure action is a result of a borrower’s defaulting on a loan that was secured by real estate. Usually, a lender has lent money to the owner of a property and the property is used as security to assure the lender that the loan will be repaid. If the lender does not receive payments as promised and agreed, the lender has the authority, given when the borrower signs the trust deed or mortgage, to foreclose under the contract. In California, the buyer signs a deed of trust and a promissory note. In other state, the relevant document may be called a mortgage and promissory note.
The deed of trust (mortgage) contains a provision that requires the beneficiary (the lender) to deliver the note and deed of trust to an independent third party called a Trustee. The Trustee holds the deed of trust and note until it is paid in full. If the property owner does not pay as agreed, the beneficiary (lender) will advise the Trustee (the third party) to sell the property to the highest bidder at a Trustee’s Sale and then repay the loan with the proceeds from the sale. The Trustee will advertise the property for sale in a legal newspaper and possibly in other papers of general circulation. Notices of Trustee’s / Sheriff’s Sales are also posted on bulletin boards in county and public buildings.
Who Holds REO?
Almost anyone who lends money and secures it with real estate could end up with an REO. Banks, savings and loan institutions, and insurance companies have most of the property in this category. However, let’s not forget the federal government: Federal Housing Authority (FHA) and Veteran Administration (VA) foreclosure are not unusual. Together the VA and HUD/FHA foreclose on more than 40,000 homes and apartment properties each year. Even individuals who sell their property can end up with REO when the new buyers neglect to pay.
To find REO, look in the local and legal newspapers for the announcements of the Trustee’s / Sheriff’s Sales and subscribe to a commercial service that provides information on defaults. Contact the note holders, local and regional banks, savings and loan associations, personal property lenders, real estate broker who specialize in REO, over-extended builders and developer, private owners, and credit unions.
BUYING FROM BANKS
Banks and savings and loan associations have special rules about the disposition (sale) of REO. For example, they almost always get an appraisal; they usually ask a broker or professional contractor to estimate the fix-up costs, and they usually attempt to sell the property themselves or to deal with a local broker.
If you plan to purchase from the bank or institution, you must know the value of the property before you contact the bank for an appointment. It is wise also to attend the sale to find out what price the institution paid to get the property back. With these two pieces of information you will know what you can pay and what openings there are for bargaining and negotiation. Sellers will always listen to proposals that either make their position better or eliminate risk of future loss.
If your initial telephone call does not reach the correct person at the bank, you will end up frustrated because the business of REO and foreclosure is usually one of the least advertised, least-known departments in the bank. Be sure you get the proper department and then talk to Mr. Big.
Write all of the sources discussed in the previous section and tell them of your interest in purchasing REO. A few weeks later follow up with another letter. Send a series of at least three. Then begin to call on the REO departments regularly. Request meetings with the REO officer or officers and tell them what you can do for them. That is what they want to know, because REO generally creates a lot of extra work for their reluctant owners and, as noted, is frequently an embarrassment.
Telephone the real estate brokers and discuss your purchase intentions. Then visit the brokers and the government offices. Tell them again of your interest and desire to purchase. Local brokers usually have an inside track about how much activity is taking place in the local market. Take advantage of this information and do not overbid the property. Many local brokers have lists of foreclosed properties distributed by government agencies such as FHA / HUD and the Farmer’s Home Administration, and these lists are updated regularly. With a simple request to the government agency you can receive these listings directly.
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