With enormous foreclosure numbers still on the rise, real estate owned
(REO) properties, or foreclosure properties that have been repossessed
by lenders, are in generous supply. Bank seizures climbed 129 percent
in March from a year earlier to a nationwide total of 51,393, according
The new wave of REO properties on the market may pique the interest of
many investors, particularly those who believe that banks are eager to
get rid of them, and as a result, are willing to negotiate to the
But can investors really haggle their way to exceptional deals?
Probably not, according to Walt Harvey, broker associate for East Oahu
Realty. From 1992 to 1996, Harvey worked as a listing agent for 14
different lenders and sold nearly 200 REO properties. Out of all of the
REO properties he sold, there was only one that he wished he had
bought, he said.
“[There is a] misconception that banks want to dump their REOs,” Harvey said. “They don’t.”
“Virtually all the [REO properties] I sold were at market value,” Harvey said.
An agent placing a sale sign on a foreclosed property
REO property bargains can be found, but not far below market value
In reality, banks view their REO properties as an asset, not a
liability, according to Harvey. They are charged by charters,
shareholders and regulatory agencies to sell their properties for as
much as they can–which usually turns out to be near market value.
And while some bargains might be found in today’s market, REO
properties are still not being sold far below market value, according
“I don’t think that REO [properties]…are necessarily a good
investment,” Harvey said. “I think people are better off looking for
motivated sellers, not banks.”
Nevertheless, investing conditions for REO properties could be
improving, especially in markets where foreclosure rates are high. REO
properties in Akron, Ohio, for instance, are a buyer’s market,
according to local real estate agent David Pontefract.
“[Investors] hold out and try to get them as low as they can,”
Pontefract said. “[But] if a property comes up that they believe will
sell faster…they would probably pay a little more for it.”
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REO properties can offer buyers some unique advantages. Foreclosures
owned by banks are usually clear of any liens that may have been
recorded against the property, according to RealtyTrac’s website.
Additionally, banks may finance the property purchases with favorable
terms, such as low down payments and low interest rates.
Finally, “bank-owned properties are usually vacant because the banks
have evicted the previous owner, saving the investor or homebuyer time,
money and emotional toll involved in the eviction process,” according
to RealtyTrac's website.
Because REO properties are almost always sold “as is,” investors who
consider buying REO properties should inspect the premises as
thoroughly as possible. Banks are not subject to the same disclosure
laws as typical sellers; furthermore, hidden damages are easily
Banks normally hire contractors to perform needed maintenance and
repairs prior to sale. These contractors, who “have no duty to
disclose” observed damages, might paint over defects or put down carpet
without checking for termite damage, wood rotting or cracked slabs,
"The so-called good value you think you got may evaporate,” he said.
Therefore, hiring a licensed home inspector is critical. Additionally,
talking to neighbors is a good way to learn about distress to the
“Neighbors will love to tell you…all the horror stories of what went
on at that property,” Harvey said. “You don’t want to find those things
out after you bought it.”
Investors should also be prepared for lengthy wait periods, as the
negotiation process could potentially take months. Because of the large
volume of foreclosure listings to be processed and industry layoffs,
loss-mitigation departments have become highly understaffed.
Nancy Geils, Owner Investing with the Stars
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