WHAT IS A REO?
The acronym REO stands for “Real Estate Owned” property. “REO” describes a class of property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction. Simply put a Lender/Bank extends financing on a house or commercial property. When the Owner defaults or no longer pays the mortgage, it reverts to the Lender and ius carried on that institutions REO Portfolio. A foreclosure process is performed with the defaulting owner to try and “work out” the mortgage or assist in restructuring the Loan. Many times, it is unsuccessful and the Lender is faced with putting the property in an Auction for bid. If no third-party bids at the auction the property reverts to the Lender. For Lenders, REOs are a liability and have departments dedicated to disposing of these properties.
DOES IT MAKE SENSE TO BUY REOs?
That depends, before you wade into those waters, you should be aware of the nuances of buying REOs. Savvy investors will engage the help of a Commercial Real Estate Broker to help navigate through the purchase process. If someone says, “you can get these properties for a ‘steal’!” – keep moving! The truth is, Lenders have a definite sales price which reflects what was owed, or close to owed, on the defaulted loans. What Lenders do provide is clear title expunging all liens including tax, mechanical or creditor claims against the property. They also clean, secure and repair hazardous or life/risk flaws’ in order to attract Buyers. However, if you are interested in buying an REO property, be aware of underlying issues or deferred maintenance as Lenders sell in “as is” condition. Your Commercial Real Estate Broker will help you prepare a purchase agreement with clear inspection provisions that allows you to understand the full extent of your investment and potential assumed liability. Overall, each Lender works a little differently but they all have the same goal – getting the best price for their liability.
Sounds a little complicated – why buy REOs? While there are specific steps involved in purchasing an REO, don’t forget the last sentence above. Lenders want to sell their liabilities and are open to negotiating, your Broker can demonstrate other like-properties in the market for comparison. A well thought out offer with “broad out” clauses allows you to buy property below market value. In many cases, income producing properties are already cash flowing with little “value add” required from the Buyer.
READY TO BUY?
The answer should be yes! There are opportunities and deals to be made as long as they are presented thoughtfully with plenty of supporting market information. Find your REO real estate Broker specialist that can help you through the nuances of buying REOs. REOs are like potato chips, you can’t stop at one, you are always looking for the next!
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Sheral Litell, has more than 25 years of experience focusing on industrial, office, land acquisition and medical properties, and has represented over 3 million square feet. Sheral also works on financial institution’s real estate portfolios in the development and execution of strategic marketing plans that ultimately maximize the value of the asset. Her background and insight give her first-hand knowledge of the newest opportunities and changes in commercial real estate. These valuable insights allow Sheral to help her clients make better informed real estate decisions locally and worldwide.