Advantages, Disadvantages and Pitfalls of REOs (Foreclosures)

Not all bank-owned properties are in terrible shape. Sure, some are uninhabitable without a lot of work. Some need lots of cosmetics - painting, new carpeting, etc. Others, however, are in move-in condition.

Commission fixed. The commission paid to your agent is set and agreed to in advance. For Short Sales, a bank might refuse to pay the full commission; this MIGHT mean you make up a shortfall if you have an Exclusive Buyer Representative contract with your agent. For REOs (Foreclosures) the listing agent has a direct contact at the bank, and the bank has already agreed to pay their listing agent a set commission based on a %-age of the sales price. The bank has also agreed that their listing agent can offer the selling agent - the agent who brings the buyer - a given %-age commission. Such %-ages are established well before the property ever comes on the market, so realize that Realtor commissions are not something a prospective buyer can circumvent, or negotiate.

REOs do present some challenges that may or may not occur in other types of real estate sales. Here are a few examples:

Unknown conditions. The bank has no history on the property and, in fact, is legally exempt from having to disclose anything about the property to the buyer. It does not know if there is an old oil tank buried, or the age or condition of the roof - or whether or not it leaks. Most banks have not even had one of their employees visit the property, or conducted any inspection of significance. The BPO and photos are normally the basis and extent of the bank's knowledge. I've never had a bank hire a home inspector to do a more thorough job. So, yes, there is more risk for a buyer.

Speed. Bank's love contracts that call for a closing in 30 days or less. They don't like to hear 60 or 90 days. In fact, most banks specify that if the buyer fails to close within the contracted time period, the buyer must pay $100 per day for each day the closing is delayed. And that includes ANY reason other than some delay caused by the bank.

Shifting costs. In a given market area, certain costs are traditionally borne by the seller and certain other costs are borne by the buyer. With REOs, the cost and responsibility is often shifted to the buyer. But in the big picture, that sum usually amounts to under $1000.

"As-Is". Means exactly that! What you see is what you get. What you don't see is also what you get. The bank will not do any repairs, nor discount the price toward repairs. They consider that all of those have already been taken into account with the list price.

Disclosures. Again, there will not be a Seller's Transfer Disclosure (the bank is exempt) because the bank has no historic knowledge. It bears repeating: What you see is what you get.

Home Inspection Timing. Some banks insist any home inspections be done prior to submitting an offer. Many buyers refuse to pay for a home inspection before knowing if the seller (the bank) will accept their offer. Look, the cost for a condo inspection is under $300 and for a home the cost is a bit more depending on the size, etc. Just consider the expense of your inspections an unavoidable cost, like "insurance." Besides, the bank still grants plenty of time to get inspections done leaving the buyer sufficient time to consider whether or not he/she wants to proceed with the purchase. Even though the bank will not do any repairs based on the inspector's findings, we still highly recommend that all buyers do a full home inspection on an REO property. Regardless of its timing, this is a sound investment that might uncover some otherwise non-visible problems. Again, all buyers should have an expert opinion on the condition of the property they are considering, just to know fully what they are getting, and to decide if they really wish to proceed with the purchase based on all facts.

Fully Executed Contract - the Deal is done. Banks very rarely change any terms once that contract is ratified. Do not expect concessions after it is signed - even if something really surprising pops up.

Repairs. I repeat, As-Is really means as-is. If the property had no toilet when it was listed and when you saw it, the bank will not be buying a new toilet.

Negotiations. When presenting an offer to a bank, there are no face-to-face chats. Usually, when we represent the buyers making an offer, we ask the listing agent to arrange a meeting with the seller so that we can not only present the offer, but so that we have an opportunity to "sell" our buyers and to appreciate a full visual impression of the seller's response to the numbers and terms our client is offering. But with REOs, no such in-person opportunity will arise. The bank does't give a hoot that Mary & Bill look forward to raising their growing family in this home. The bank doesn't care of the local chapter of the Hell's Angels is purchasing the REO. The bank only cares about the bottom line and the speed of the closing. The listing agent prepares a "net sheet," (a HUD-1 or similar form) to show how much money the bank will net based on the offer.

These are just some of the reasons why it is so important for buyers to appreciate the value of employing agents experienced in dealing with banks. Short sales, trustee sales, foreclosures and REOs are quite different from the typical "normal" deals.