Have you considered buying a home that’s been foreclosed on and being resold by the bank in the hopes of getting a great deal? These properties are sometimes called bank owned properties or, officially, real estate owned or REOs. This kind of real estate traditionally has been an investors market but there are people today who’re taking advantage of the current market conditions to purchase a home for themselves at what may be a steeply discounted price. However, it is important that novice REO buyers be aware that buying and then living in a property that has been foreclosed on isn’t quite as easy and cheap as it looks.
If the foreclosure process has been handled properly many of the typical problems with buying a foreclosure at the courthouse steps are taken of prior to the home going into a REO inventory. Major banks generally hire a foreclosure property management company to insure that the house is officially vacated by the prior owner and not vandalized by them. This also should prevent you from being caught up in lawsuits brought by delinquent borrowers and having to evict them. One of the first things to check is if the mortgage lender who’s listing the REO property has taken care of these important details. If the home in question is still occupied or in obviously poor condition it’s best to pass on it in most cases. However, it is important to note, that foreclosure property management services do not include a proper home inspection or guarantee against other potential problems.
As with any primary home purchase it is essential that you have the property inspected. Even if you’re buying for investment purposes an inspection may save you thousands of dollars. Many people get caught up in the competition and quite often the novice REO buyer ends up purchasing a money pit. Sometimes REOs are sold at auction where you can’t get a full inspection report ahead of time. In this case, leave the buying to the pros with a lot of cash on hand who can take a loss if the property turns out to be a dud. Don’t bet the farm on an uninspected REO home unless you’re willing and financially able to take the risk.
One thing that you have to consider is that a REO home might have structural issues that led the prior owner to the tough decision of letting it go into foreclosure. For example, some homes in foreclosure in Florida right now have defective Chinese made drywall that will cost thousands of dollars to correct. Other homes might have serious termite damage. Others may have dangerous mold issues. There have been reports of expensive homes built during the housing boom that were so poorly constructed that they’re essentially worthless because they’re falling apart.
Beyond the serious problems, you can expect the REO home to have some damage simply from someone living there and general wear and tear. You should budget for at least new carpet and new paint in any REO home you buy. You will probably also need to make drywall, hardware and other general minor repairs. Also, it is quite likely that the HVAC system will need maintenance and, if the home is more than a few years old, a new roof.
The bottom line is that you should have cash reserves equal to about 10-15% of the purchase price for repairs. Do not count on credit for these repairs since today it is quite common for banks to refuse equity loans on previously foreclosed properties. Using credit cards or lines of credit for these repairs is also risky in today’s financial climate. In today’s real estate market cash is king.
It is also quite important to make sure that any outstanding liens and back taxes have been resolved. Depending on the state laws, you may be responsible for these items as the buyer of the foreclosed property. You do not want this to come as a surprise to you after the fact. If you don’t know what you’re getting into this could significantly increase the cost of the home, making a great deal into a nightmare. For your own protection you should always consult with a local real estate attorney before buying a foreclosed REO property so that you understand your potential legal liability.
Most banks make a list of REO properties for sale available online or go through a real estate broker or management firm who handles this for them. My recommendation for the novice buyer is to go through a real estate agent who specializes in selling foreclosures and REOs or a REO specialist. While the savvy real estate investor can save money with a do-it-yourself approach the risk to the beginner is quite significant. That’s why it’s best to work with seasoned real estate professionals when buying a REO property.