Some time back, Bloodhound Blog published a must-read piece for home buyers, The Top 7 Things Every Home Buyer Should Know.  (This item for mortgage brokers is also a good one!)  The points hold true if you are buying your 1st home or your 10th home!  Because so many of the homes currently available are REO, it’s a good idea to look at the issues specific to them.

Home prices — actual closing prices — are down 7.6% year over year, propelled by these properties.  They continue to decline despite the assurances of the National Association of Realtors that this or any other time is a great time to buy a house. Please remember, my opinion is that on a local basis, we are in the long process of putting in a bottom on prices and have a stable amount of housing inventory. Your Region May Vary. It is interesting to note that despite this drop in home prices, inflation is still at the highest levels since the Original Bush Administration. Let’s get started.

1. REO means Real Estate Owned. It’s the title of the line on the lending institution’s asset sheet that describes these properties.  They are also called, foreclosed homes, foreclosures, bank-owned, or repossessed.

2.  There are a lot of them, but not as many as some people will have you believe. Most of the foreclosure data you will see gives a total number of everything from Notice of Default (NOD, the first step of the process) to REO.  MarketWatch was kind enough to break it down both by type and by state in the tables at the end of this article. Nationwide we had 55,601 NODs filed and 77,295 actual repossessions in July of 2008;  in Nevada we had 5,350 NODs and 3,315 repossessions (the majority in Clark County). Since there were 3,030 properties that closed and were sold in Clark County in the same month, we clearly have some equilibrium. Roughly 25% of the homes currently available in the Las Vegas Valley are REO (roughly 4,000 single family homes and 1,200 condos).  We already debunked the “28,000 vacant in Vegas due to foreclosure” myth, right?

3.  They are not all bargains. Sure, you can get some good deals.  But remember, the bank wants to get a good deal too!  In most cases you can’t offer 65% of the purchase price and have a deal. Furthermore, it is a total myth that “banks automatically drop the prices every 30 days.” Some do have a system for reducing prices on a regular basis, but not all. Just like any other sale, prices are set in relationship to current market prices and how much money the bank has in it.  If you see what seems like a really good price, it may be priced to attract multiple offers (bidding up the home to higher levels).  It may also be that it is fairly priced once needed repairs are taken into account.  This brings us to the next important point.

4.  Many of these homes need work. Just a few years ago, the conventional wisdom was that if somebody couldn’t afford the house payments, they probably couldn’t afford a lot of maintenance either. Houses sitting vacant tend to have maintenance issues in general, as nobody is there to make repairs as needed.  This is one of several reasons that REO used to be an investor’s game:  buy it, fix it, rent or sell it.  Now, there is the added complication of “house rage”, where the outgoing owner makes as big a mess as possible on the way out.  The “nice” ones are the exception, not the rule.

5.  All of them are sold “As Is”. Taken with our last point, that means you need to count on making any necessary repairs at your own expense. Be sure to figure this into your home purchase budget, and be double sure to get an experienced home inspector! You will not get any standard disclosures such as Nevada’s Seller’s Real Property Disclosure (SRPD), because the bank never lived in the home and has no way to know what might be wrong there.

6. FHA financing is a tricky thing on these homes. The Federal Housing Authority has very strict rules about the condition of homes. Broken glass has to be repaired.  Plumbing must be in good order. The property has to pass a termite inspection. And most importantly, important defects must be fixed before closing! But the bank is selling it “as is.”  But it can’t be sold until the repairs are made.  Irresistible force meets unmovable object.

7.  The listing agent will try to make the buyer make repairs at his own expense before closing. The owner is in no position to make repairs;  the owner is a large bureaucracy, probably based in another state.  The listing agent wants to get things done. Hey, it’s going to be your house anyway, why shouldn’t you just pay for the repairs and move towards close?  There are two big reasons why not!  First, if for some reason you don’t close on the house, you lose the money you put towards repairs.  Second, it’s not your property yet;  you wouldn’t just send a contractor to do work at your neighbor’s house, would you?  This is to say nothing of the inconvenience to you and your Realtor of arranging a contractor, getting them into the home, and supervising the repairs.  If you find yourself in this situation, insist on getting written permission to get the work done, including a “hold harmless” clause should the work result in damage or injury.  I often find that the bank would rather pay for the repairs (perhaps being reimbursed from the buyers at escrow) than actually sign any such permission.

8.  It is a longer process to buy these homes than to buy from a private seller. If you are on a strict timeline, don’t try to buy an REO property.  Although some banks respond quickly, count on spending 5-10 business days before you hear anything about your offer.  Last week I got a phone call about a property a client put in a purchase offer on back in June.  By the time counter-offers go back and forth, you will spend several weeks.  That’s one of several reasons I have started putting in proposed Close of Escrow dates like “30 days from acceptance” or “45 days from acceptance”.  You don’t know up front when you will have an accepted offer!

9.  You will end up signing away most of the protections your state’s or local Realtors’ group’s forms give to buyers. The forms commonly used by Realtors in your area almost always balance the interests of buyers and sellers.  Since all the Realtors use them, they all know the provisions and what they mean.  Dealing with a bank changes the rules.  Once you and the bank come to an agreement, they will send over a lengthy “addendum” written by their team of lawyers. Every bank has one, and they are all different. The one thing you can say for certain about every single one of them is that they are written to protect the interests and rights of the bank. You do not have the right to change a lot about it;  their attitude is that you can take it or go find another property. Although your state’s laws may overrule some of the provisions, you will have a hard time enforcing that. Most of these documents include the “as is” provisions, although in Nevada you will also have to sign and notarize a separate Waiver of NRS 113 Rights.  Some even say the bank has the right to cancel the transaction any time before closing.  Sadly, it’s true when I say “It’s not a sale until Close of Escrow”.

10.  Once everything is signed, it’s very difficult to get anything changed. A number of people had to sign of on this before the paperwork made it back to you, and all those people will have to sign off on it again to make changes.  Pay close attention to the paperwork, and particularly the closing date.  Make sure your mortgage professional is aware of the closing date.  It’s not set in stone;  if it were we could change it with a mere chisel.  Even if you can make changes, it will take a week or two.

11.  Escrow is a more complicated process than with a home from a private seller. In areas where HOAs are prevalent, there is another wrinkle.  Banks aren’t particularly conscientious about paying the HOA dues, and delinquent amounts must be paid before the sale can be completed.  Sometimes, the HOA sends a Notice of Default and tries to foreclose on the bank!  If there are other “defects in the title”, those have to be cleared too.  Even though your escrow officer will start working on this as soon as he or she gets all the documents, it still takes time.  Furthermore, all those people who had to approve the transaction in the first place have to approve the final sale documents.  Most of them are not in your home state.  They may be in several different places. It could take a week after you sign your closing documents before the sale actually closes.

I hope this lets you know what to expect when trying to purchase one of these properties.  I’m looking forward to helping you.