Buyer’s Guide to Understanding the REO Transaction

What is an REO?

REO means “Real Estate Owned” and is an expression used in the real estate industry to describe property which is owned by a bank because it has foreclosed on one of its loans.

Background

In our current economic market, foreclosures are on the rise. When a borrower defaults on his loan, the bank can take back the property which is the collateral or security for its loan. Most lenders do not want to own these properties, because the maintenance and management expenses add to their costs and decrease profitability. This climate creates a favorable environment for both investors and residential home buyers who are searching for a good deal, and the REO market is presently quite active.

If you are a prospective REO Buyer, the information in this Tip will help you understand the unique characteristics of these transactions and prepare you for an escrow process which may be different from what you have experienced in the past.

Properties are Sold in “As Is” Condition

As a Buyer, remember that REO properties are sold in their present “as is” condition. The Seller has never lived in the property and will not make representations about its condition or provide warranties against defects. As the Buyer, you are responsible for making your own determination as to the condition of the property, its suitability for use, and for repairs or refurbishing that may be needed.

About Your Purchase Contract and New Financing

The REO Seller is not likely to accept changes to the purchase contract once the original deal has been struck. Your transaction will move more smoothly if you don’t attempt to change your original agreement. Even minor alterations can create a problem for the Seller. If you are obtaining new financing to purchase your property, your lender should be aware that you are purchasing REO property, especially if the property is in a distressed condition. Confirm that your lender is willing to participate in an escrow with an REO Seller and understands that flexibility with the Seller’s timetable may be required.

The Escrow Process

It is important to recognize that the Seller is a corporate lending institution, dealing with a huge volume of properties. To quicken the process of liquidating its properties, the Seller employs a large staff of professionals whose sole job is to manage the sales of the bank’s properties according to the policies and procedures which it has established.

As a result, the typical timetables of a standard escrow will not apply in an REO environment. For example, after a Buyer’s offer is accepted, the first contact with the escrow officer may not occur for three weeks or more while the Seller completes its internal procedures. Though you can’t control the Seller’s actions, you will want to be sure to fulfill your own commitments under the contract in a timely way by working with your escrow officer and your agent throughout the escrow process.

What to Expect at Closing

Your escrow officer will give the Seller a 72-hour pre-closing notice. This is a standard requirement for REO sellers. During this time, the Seller will sign final escrow documents and approve the settlement statement. Occasionally, this step will take a day or two longer than expected. It is not helpful to the process to try to rush this time period before closing. The Seller will follow its established guidelines, even if it means delaying the escrow closing date.

The Importance of Communication and Flexibility

Consider the possibility of a closing delay if you are making moving plans. Understand that the Seller will set the pace of the transaction, and this is especially true in the last days prior to closing. Maintain good communication with your real estate agent. An experienced REO escrow officer is an excellent resource for information and understands the best ways to move your escrow to a timely, trouble-free close.