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In today’s residential real estate market, there is a lot of interest in buying bank owned properties. Some of the information you may read about is convoluted and confusing. Therefore, let this article serve as a breakdown of how purchasing bank owned property typically works.
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. These properties are now owned by the bank because the properties failed to result in a bid. In fact, most foreclosure auctions do not even result in bids. When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees which accrued during the foreclosure process.
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs associated with the foreclosure process. In fact before you can even bid at a foreclosure auction, you have to have the money readily available for the full amount of your bid. In the event you’re the successful bidder, you receive the property in “as is” condition, subject to the redemption rights a previous owner has available to them to come up with the money during the redemption period, if applicable. “As is” condition means the buyer takes the property and his/her own risk so there is a possibility this risk may involve someone currently residing on the property or liens being attached and are associated with the property.
A REO, by contrast, is a much “cleaner” and attractive transaction. Because the property didn’t result in a sale at the foreclosure auction, the bank now owns it and cares for it. It is now known as an REO property. As an REO, the bank will remove any tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. As an aside, REO’s may be exempt from normal disclosure requirements.
Once the property reverts, the bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.
Despite the clean title that one gets with an REO, be warned that buying one may not yield a great bargain. One should be extremely cautious and diligent about purchasing a REO if your intent is to make money off of it. In the REO arena, banks are aggressively marketing the property to get them off the books but are also attempting to maximize the sales price. As such, don’t be surprised at a counter-offer from the Bank. Banks have entire REO departments that manage this process.
Before making your offer, you’ll want to contact your agent and find out as much as you can about the condition of the property and their process for receiving offers. Most banks will not provide financing on their REOs, so if it has extensive damage you might have to pay cash. This is especially true if the property has extensive damage and you are purchasing it “as is.” Remember that REO’s sell at pretty close to full market value and are not the deals presented as advertised online or through the televisions. However, diligence could result in a great deal!
Lance T. Denha, of Denha & Associates, PLLC, works in the areas of business transactional law, foreclosure/pre-foreclosure workouts and bankruptcy law. In the business area, he specializes in general corporate law with a concentration in business and commercial transactions, property tax appeals, health care, and liquor licensing matters. In the foreclosure/pre-foreclosure workouts legal arena, Mr. Denha represents borrowers against lenders in seeking out residential loan workouts for purposes of avoiding foreclosure, or in the alternative, Mr. Denha will represent borrowers in foreclosure defense cases against lenders. Lastly, in the bankruptcy area, Mr. Denha’s focus is on bankruptcy law matters, specializing in debtor representation, creditor relations, and related litigation.
Mr. Denha is a member of the State Bar of Michigan and State Bar of Florida where he is licensed to practice law in Michigan and Florida.