Have you ever wondered how a piece of real estate becomes an "REO Bank Owned" property and what exactly this designation means? Real estate investing guides and gurus often advise newcomer real estate investors that buying REO property
will allow them to buy below market value. While this may be true in some instances, REO properties also have certain risks that other types of real estate do not have. Understanding how a property is designated as REO bank-owned, how it is processed, and the basics of buying it, are useful for anyone interested in real estate investing.
What Does REO Stand For?
The term REO refers to real estate which has been foreclosed upon, and that has then defaulted back to the bank after they have attempted to sell it at auction. The acronym REO originated as an abbreviation of another acronym OREO, a common accounting term used in banking. OREO stands for "Other Real Estate Owned" which describes real property owned by a bank that is not directly related to their business model. When used on a bank balance sheet, OREO indicates a non-earning asset and is legally defined by the bureau within the Federal Treasury which regulates national banks and thrifts.
How Property Becomes REO Bank Owned
The process of becoming bank-owned property begins with a foreclosure. Foreclosed property will be featured in a county auction as mandated by state law. These auctions are not organized by the lender but by the local government either at the state or county level. The lender or loan servicer sets the opening auction bid at an amount that equals the outstanding loan balance, interest accrued, loan fees, and any related attorney costs. With the inclusion of fees and interest, this opening bid is often very close to market price if not slightly higher. Most auction attendees are attempting to purchase real estate property below market value therefore, it is quite common that there are no bids above the opening bid. If there are no bids higher than the opening price then the property is purchased by the attorney conducting the sale and it reverts back to the lender or servicing entity. A piece of real estate thus becomes a bank-owned REO property. Sometimes banks can acquire REO property from another failed bank through a loss-share agreement with the FDIC. Loss-share agreements contain additional regulatory requirements which may mean that the bank has to wait a certain period of time and/or obtain FDIC approval prior to completion of property transactions.
Selling REO Property
Once the bank or loan servicer owns an REO property, it will evaluate its options. There are quite a few factors which affect the decision of whether or not to sell an REO property. If it has FDIC loss-share agreements in place then there will be specific regulatory requirements that must be met. If property prices are extremely depressed then it may be advantageous to hold on to the property until prices rebound. If the REO property holder does decide to sell then the property needs to be prepared. The preparation process involves removing any existing occupants, clearing liens on the property, and determining a fair market price. But it does not include physical repairs or upgrades. REO bank owned property is different than property typically sold in retail markets because the property is sold "as is" structurally. The seller will sometimes seek to maintain the property through the use of a property preservation company which will change house locks, board up windows, remove debris, cut grass, repair roof leaks, and winterize if necessary. Once it's ready for sale, bank-owned property will be offered to the public in a variety of ways. REO property can be relisted at future county auctions, real estate brokers, and specialized REO brokerages.
Buying an REO
There are a variety of options in locating an REO. You can ask the bank for a list or you can work with a real estate agent that will show you REO properties owned by several different entities. If you locate an REO property that you're interested in you can contact the lender directly through their REO or asset management department. In order to submit an offer, you will need to carefully consider the "as is" quality of the property. The discount you may get by purchasing a bank-owned property can easily be negated by necessary repairs not visible by exterior inspection. If you can, hire a licensed property inspector to estimate costs and factor those costs into your offer to the bank. If you do not receive access to the property then an external inspection can still provide you with some information. If possible, you should offer photographs and inspection documentation to support your offer. Another important step is to hire a title company to search public records for any pre-existing liens or outstanding taxes that may be associated with your chosen property. Banks do generally clear any outstanding loans or liens before selling the property but it is a good idea to make sure it's clear.
Financing REO Property
A bank-owned property that is priced advantageously will often be sold quite quickly and have multiple bidders. If you make a bid on an REO property, you should be prepared with your financing so you can close the sale quickly. A traditional lender will usually take several weeks to a couple of months to process a loan approval. A tactic that some REO investors use is to open an unspecified line-of-credit with a bank that they can they then convert to a mortgage loan if they find a property from that same bank. However, it is very difficult to predict where the next opportunity will appear. This is why many commercial REO investors reach out to alternative commercial lenders like Riverdale Funding
, LLC to quickly secure financing for commercial REO properties.
Riverdale Funding can complete an application for commercial real estate financing in as little as two weeks because they are a hard-asset lender. This means that they base the commercial loan terms mainly on the value of the commercial property to be mortgaged rather than the financial history of the borrower. This alternative underwriting process also makes asset-based lenders a great choice for borrowers with less than an excellent credit score.
The Particulars of the Real Estate Owned Market
While there may be opportunities to buy properties below market value within the REO Marketplace, it is also clear that there are unique characteristics of these properties that a potential investor should be aware of. Understanding how the property became designated as REO can provide clues as to how likely the bank or loan servicer is to sell the property. There are also certain risks to buying these properties because of their "as is" status. Financing can be very time-sensitive because the bidding is often very competitive. Despite these particular attributes, Real Estate Owned properties do often present great opportunities for the savvy investor.
While commercial REO property can offer great value, acquiring an REO loan requires a lender that can move quickly. If you are interested in purchasing commercial real estate owned property please contact Riverdale Funding