Some Risks of Lender Owned Properties (REO)

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I have found your blog to be very informative. I was out riding my bike and rode past a house for sale. In a few minutes of Internet research I've found out a bit about it. The property is bank owned and it sounds like a property in need of repair. However the information I have found out doesn't add up.

From a real estate web site listing recent sales in the area, I found out that the property last sold for 5% less than the asking price. Apparently the sale happened in October.

The house is now listed in the local MLS service, and the text of the listing leads me to believe that the house was listed in December. It seems from what I have read on your site a foreclosure takes at least 3 months, and this house apparently was back in the hands of the bank and listed two months after it sold.

The house is priced well below the market and within my budget, but that the bank got it back that quickly raises a giant red flag for me. Also, given that the MLS listing says the sale is as-is and that there are no contingencies allowed raises another red flag.

How if they don't accept contingencies do you do a home owners inspection? Pay for one before making an offer, and risk you'll be throwing the money away if the seller doesn't take your offer? Or do a home inspection after they accept your offer, and forfeit your deposit if the inspection covers up a big problem.

Actually, foreclosures are perfectly fine for a first time buyer if you've got the wherewithal to work with them.

Lender owned, which means it didn't sell at auction, is an entirely different story than buying at the auction. You can make offers with contingencies for inspection, usually for seven or ten days, and providing it's an attractive offer otherwise, the lender may very well accept. You're always risking the inspection money on any property, because if it comes out that the house is messed up, you still have to pay the inspector. For lender owned (REO) properties, you don't need to forego an inspection contingency. Financing contingencies are also very doable - I've got one in escrow now with both, and I'm working on another. If it wasn't possible, they would reject the offer out of hand, and they haven't. Disallowing an inspection contingency makes the property worth a lot less, because a lot fewer people are willing or able to handle the risks involved. If your particular property is specifically disallowing inspection contingencies, it tells me they know about a problem, and it's almost certainly a big one. It can still be worked, but get yourself a really top-notch buyer's agent. It's worth paying them (or paying them extra) yourself if you need to, because you'll make more on this property, and they will earn it, because there's a lot more liability for them on this kind of property.

If you're looking at an REO, be aware before you even step onto the property that there are going to be maintenance issues. More often than not, there are even sabotage issues. Furthermore, because the lender doesn't live there and almost certainly knows less about the property than an inspection will reveal, they are exempt from transfer disclosures. Lender owned properties are not for Mr. and Ms. Upper Middle Class looking for the perfect house, they are not for Mr. and Ms. Just Barely Scraping Into The Property, and they are not for Mr. and Ms. Fumblefingers, Mr. and Ms. No Time, or even Mr. and Ms. Procrastinate. But if you've got the inclination and the skill or the cash to fix it, foreclosures can be quite lucrative. Foreclosures are always a risk - the more so because the current owner literally does not know and has no way of knowing what the condition of the property really is. That lender has never lived in it, so they cannot disclose things that most owners would know and be required to disclose. Furthermore, the lender usually requires some addenda of moderate obnoxiousness or worse, aimed at getting the deposit and limiting your opportunity to exit the contract - and making the property value even lower, as such addenda are a thing of negative value to most folks. But if you've got the resources to make that risk a manageable one, you can pick them up well below the price of properties with similar characteristics.

Lender sales are pretty much always "as is." However, I have successfully negotiated repairs and allowances for repairs upon multiple occasions. They are more limited in nature than most, due to the "as is" nature and most lender's unwillingness to put more money into the property, but it is very possible if you discover defects that make the property less than fully inhabitable within the definition of the law. Hot and cold running water, working electricity and heat (Not air conditioning, however), total enclosure of the dwelling area, and active fire hazards can all be negotiated even in "as is" properties. There really is no such thing as a pure "as is" sale.

You might also want to read my article, "Why There Is Money in Fixer Properties" if you haven't already.

Caveat Emptor

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This page contains a single entry by Dan Melson published on November 5, 2019 7:00 AM.

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