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What Makes REO Purchases So Attractive?

Most people have heard of "short sales" and "foreclosures" but there's another part of the distressed properties market, which can also be very interesting: REOs, or "real estate owned" by lenders.

If we think of foreclosures in terms of stages then REOs represent the end of the line, the last and final resting place for homes that have been lost in the foreclosure process.

Stage I: A purchaser buys a home and finances with a mortgage. All is good.

Stage 2: Something happens to the homeowner which makes payment of the mortgage unfeasible. Whatever the reason the owner falls behind on the mortgage and the property is now distressed.

Stage 3: With the mortgage unpaid the lender moves to either modify the loan or seek a foreclosure. Meanwhile, the owner may well engage a real estate broker to try and offer the property as a short sale.

Stage 4: No buyers are found for the property or the lender will not agree to a short sale. The property is foreclosed and listed for sale at auction. The lender, trying to protect its interest, winds up as the highest bidder. The result is that after the auction the lender takes title to the property. Once the property is owned by the lender it's a genuine, bona fide REO.

At this point the lender is a property owner. This may sound great but actually the lender is not in the real estate business. To the lender, owning a home means the property must be maintained, insured and taxes must be paid. These are all expenses, meanwhile most REOs are not rented so there's no income to offset the lender's costs. Basically, the lender sees the house as a bottomless pit in which to dump money.

The lender is now holding the remains of what was once a perfectly good house. It may still be a perfectly good house, but the owner was unable to sell it, the property did not sell at auction, and now it's being held by the lender – and the lender doesn't want the house. This is where REO buyers come into the picture.

REO buyers have an interest in the property because it typically sells at discount. Some of this discount is related to status – the fact that the property did not sell at earlier points in the foreclosure process. Some of the discount may also be related to condition. A home which is not occupied or maintained can have physical issues. Some problems of condition may be cosmetic and some may be far more important.

REO buyers know that part of the reason for the discount is that a property likely needs attention. No two REOs are alike, nor are the needs and preferences of possible buyers. Discounts are plainly out there, but purchasers need to pick and choose with care among the large inventory of REO properties now available, a marketplace well understood by the sales professionals at Carrington Real Estate.

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