The Downside to Buying REOs

REO stands for real estate owned, with the implication that it is owned by a bank or finance company.  With the big up swing in foreclosures, there are more and more bank owned properties listed with the various MLS providers.

What we are seeing here, in

Louisville, Kentucky, are the asset management companies becoming more and more difficult to work with.  Because a property is listed, and I am a REALTOR, I use a standard Board of REALTORS offer to purchase agreement signed by my buyer client.  The REO company, or asset management group then “verbally” counters or agrees to the contract via the listing agent. 

Unfortunately, just because you have an “acceptance”, doesn’t mean you have a real contract, because all of the REO companies stipulate that acceptance is contingent upon the signing of additional addendums.  These addendums vary greatly by company and oftentimes negate major portions of the original offer. 

It is really important for buyers to understand that with a bank owned property, the original offer to purchase agreement is only the starting point, and the owner or management company is essentially calling the shots on the transaction.  For REALTORS working with clients, it is imperative to understand and convey to the client, that almost all the banks have certain guidelines and procedures that may not be in the best interest of the buyer.   Sometimes the listing agent will be able to provide the addendums prior to writing the offer.  In other cases, the listing agent doesn’t know to which company the contract will be assigned so they will not get the addendums until after the contract is written. 

Most companies require the good faith deposit to be non refundable after the inspection period, and I even had one company send notice of required fees for the buyer well after the inspection period.  The buyer was justifiably angry, since he was told he could pay the $650 fee to the asset management company or release the contract and lose his $1000 good faith deposit.

 REOs are usually listed “as is” and it is unheard of for a management company to agree to repairs, so offers need to really reflect the condition of the property.  That being said, I have sometimes seen them agree to a credit for the repairs at closing.  This gets really tricky if the lender requires repairs prior to closing, and the bank owner will not allow any repairs until after closing.  Asset management groups never agree to escrow for items after the closing.

Buying REOs is complicated, and not for everyone.  I’m really trying to educate first time and low down payment home buyers about these properties.  Unless they are in stellar shape, the loans usually won’t go through based on repairs.  I hate to have a buyer client spend money on inspections then have to release the contract over the repair request.