What is an “REO”?

“REO” is an acronym for “Real Estate Owned” and describes real estate property owned by a Lender who took it back under foreclosure.

In certain parts of the country, it seems like all you see, hear or talk about are REOs. An REO purchase is an excellent opportunity. The key is to do your inspections and due diligence and know what you are getting into.

What do you watch for as a Buyer of an REO property?

Single family or 1-4 unit homes -

• The REO Seller has lost money already on this property; they will be very tight-fisted when negotiating your offer.
• Be sure you investigate the property thoroughly before making a decision to buy. Normally the REO Seller will demand that you buy it “AS IS”. There will probably be no termite repairs or home protection!
• The properties that have been foreclosed on are usually in terrible shape. Sometimes only the shell of the house is left. Buyers should be aware that considerable amount of work may be needed to make it habitable.
• It’s always good to have cash on hand to buy, especially if you are submitting a low offer. The REO Seller will choose that “All Cash” and immediate closing offer over an one with a loan contingency, even if it is for a lower price.
• Are you an investor seeking to flip? Some REO Sellers may put in a clause that will not allow you to re-sell within a certain period of time.
• A foreclosure of a mortgage will wipe out any loans of a later date. Check the title preliminary report to make sure that the REO Seller is the designated owner and that there are no other liens on the property that was not taken care of by the foreclosure.
• Many foreclosed properties have city trash and repair liens because the Seller did not upkeep the property to the City’s satisfaction while the foreclosure was being processed. Normally Escrow Officers will check to see if any of these liens re recorded, but sometimes the liens are just mailed to the REO Seller at the last known address or tacked onto the door of the property. Hopefully the Listing Real Estate Broker will be aware of such liens and will bring it to the Escrow Officer’s attention to be paid by the Seller at closing.
• REO Sellers like to list their properties with a proven Real Estate Broker in the area. To find REO properties to buy, develop a business relationship with Real Estate Brokers who have such listings directly.
• Dealing with an REO Seller may involve dealing with as many as 15 different people who handle only certain functions. Once your offer is submitted, don’t request changes unless it is imperative. Don’t change the Buyer’s name. It may mean the offer has to be re-submitted.
• Many of the REO properties in California’s Inland Empire counties – Riverside, San Bernardino etc, may be situated on Indian land, where the Bureau of Indian Affairs has jurisdiction to approve the transfer of all land ownership. Note: a Grant Deed is not used!

What do you watch for as a Buyer of an REO property?

Vacant land, half-developed tracts, unfinished income property -

• The REO Seller has lost money already on this property; they will be very tight-fisted when negotiating your offer.
• Be sure you investigate the property thoroughly before making a decision to buy. Normally the REO Seller will demand that you buy it “AS IS”. There will probably be no termite repairs or home protection!
• The properties that have been foreclosed on are usually in terrible shape. Sometimes only the shell of the house is left. Buyers should be aware that considerable amount of work may be needed to make it habitable.
• It’s always good to have cash on hand to buy, especially if you are submitting a low offer. The REO Seller will choose that “All Cash” and immediate closing offer over an one with a loan contingency, even if it is for a lower price.
• Are you an investor seeking to flip? Some REO Sellers may put in a clause that will not allow you to re-sell within a certain period of time.
• A foreclosure of a mortgage will wipe out any loans of a later date. Check the title preliminary report to make sure that the REO Seller is the designated owner and that there are no other liens on the property that was not taken care of by the foreclosure.
• Many foreclosed properties have city trash and repair liens because the Seller did not upkeep the property to the City’s satisfaction while the foreclosure was being processed. Normally Escrow Officers will check to see if any of these liens re recorded, but sometimes the liens are just mailed to the REO Seller at the last known address or tacked onto the door of the property. Hopefully the Listing Real Estate Broker will be aware of such liens and will bring it to the Escrow Officer’s attention to be paid by the Seller at closing.
• REO Sellers like to list their properties with a proven Real Estate Broker in the area. To find REO properties to buy, develop a business relationship with Real Estate Brokers who have such listings directly.
• Dealing with an REO Seller may involve dealing with as many as 15 different people who handle only certain functions. Once your offer is submitted, don’t request changes unless it is imperative. Don’t change the Buyer’s name. It may mean the offer has to be re-submitted.
• Many of the REO properties in California’s Inland Empire counties – Riverside, San Bernardino etc, may be situated on Indian land, where the Bureau of Indian Affairs has jurisdiction to approve the transfer of all land ownership. Note: a Grant Deed is not used!
• Do your due diligence! And be sure you have written into your Offer sufficient time to do so.
• Request the preliminary reports from the Title Company together with underlying documents for review early during the due diligence period.
• If your legal counsel requires a Title Commitment report or a Pro-Forma instead of/in addition to a preliminary report, let your Escrow Officer know at the opening of the transaction.
• Do you foresee that you will need the ALTA Extended Coverage policy of title insurance? In order to be able to issue this policy the Title Company will want an ALTA Survey from your engineers. Normally the Seller will not pay for this or for the extra premium cost to this policy.
• If there is a need for special endorsements for certain exceptions to the title policy, please let the Escrow Officer know early so that this can be communicated to the title company for underwriting purposes.
• Foreclosure on a property that was in the middle of being developed and built has its own special issues. Foreclosure may not wipe out mechanic liens and foreclosure may not prevent the contractors from filing lawsuits and Lis Pendens against the property. An experienced Asset Manager, Escrow Officer and Title Officer will address these mechanic liens issues early, but as a Buyer, you should also be fully aware of the demands on unfinished construction projects.
• Are you forming a special corporate entity to purchase the property? Start the process early. Due to budget cutbacks California’s Secretary of State has not been able to process the establishment of new legal entities expeditiously.
• REO Sellers in these types of transactions normally will declare the good faith deposit (which might be a substantial amount) non-refundable (or “hard”) once the due diligence period has been completed and approved by Buyer. They also don’t like to extend closing dates especially if an end-of-quarter is coming up. It is important for the Buyer to calendar closely the important deadlines to meet.

Responsibilities of an Escrow Holder

• Prepare escrow instructions and all appurtenant documents, including future amendments that reflect any changes agreed upon by the parties. The escrow instructions are the “Map” which will guide the Escrow Holder through the transaction.
• Order and review the preliminary search report issued by the Title Company. Is the property under the Seller’s name? Are there any unusual loans, judgments, or exceptions on the preliminary report that will affect the Buyer and the Seller?
• Contact and provide necessary information to Buyer’s new Lender, if any.
• Obtain payoff information from Seller’s existing liens and judgments.
• Track all conditions stated in the transaction and ascertain that they are done before the transaction closes.
• Order insurance for Buyer
• Receive and review Buyers loan documents. Are the Buyers’ names correct? Property address? Alert everyone if there are any special lender conditions that need to be fulfilled.
• Arrange for loan documents signup with Buyers.
• Figure how much money Buyer needs to bring in.
• Figure how much money Seller will receive.
• Package signed loan documents together with all special lender conditions for transmission to Lender and request for funding.
• Communicate with all parties on funding and closing
• Set up closing with Title Company, make sure there are no last minute surprises in liens and judgments against the Seller
• Balance the file with Buyer’s downpayment, Lender’s funding amount, pay all liens and invoices given to Escrow.
• Provide an individual accounting of the monies received and spent to each party.