Sunday, June 29, 2008

Truths about REOs

Thank you for reading my blog. This post was written in 2008 and the real estate market is ever evolving. It is now 2010 and the real estate world is very different, especially in the Northern Virginia area. If you're considering purchasing a bank owned home now, please refer to the updated series found by clicking HERE.

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Despite the fact that most people, practitioners and consumers alike, are now familiar with the term REO, some myths still remain. Here, I’ll address a couple that I seem to be hearing every day.

But, first, for those that don’t know, REO stands for Real Estate Owned. This generally refers to properties which have been foreclosed upon and which are now owned by the bank. In today’s market, these properties are being marketed in large numbers, and consume about half of the available inventory in many areas. So, before you enter the buying game, there are a couple of myths you should better understand.

Myth: Foreclosures are always a great deal.
Here, people often are using the words "Foreclosures" and "REOs" interchangeably, although they are not technically the same thing. In any case, considering the "as is/where is, take-it-or-leave-it" nature of the transaction, REOs and foreclosures SHOULD be a great deal. But, never assume. In some market conditions, I've heard of practitioners referring to foreclosures as “fool’s gold” because only a fool would believe they were a great deal. The message here: always evaluate every purchase individually. With these transactions, make sure you're well educated on the market conditions, and that you carefully compare the value of these properties with other types of sales. Remember to calculate in the risks and frustrations with buying a bank owned property vs. other properties in more traditional sales. At the end of the day, you have to feel like it was worth it all.

Myth: These banks don’t want the properties, so they’ll give them away.
Well, banks do not want the properties. They really don’t know what to do with them. However, out of need, they are now systematizing the management, marketing and sales of these properties. Consumers often fail to consider, however, that most banks have shareholders and they have a fiduciary responsibility to sell the properties for FAIR MARKET VALUE. By law, they are not permitted to give them away, or even come close to that. They are required to go through a process to determine what fair market value is, and to make sure the sales price is in line with those determinations. Compared to the average seller, negotiations with a bank may be tougher.

Consider this: an individual seller is making emotional decisions and is driven by their personal circumstances. On any given day, they could decide they don't care what they get for the house, so long as they don't have to mow that lawn one more time! On the flip side, they could decide since they loved the home and raised three kids there, that no matter what the market is doing, they are not selling their home for a price that does not match their emotional attachment. The dynamics of every real estate transaction are far reaching. As a buyer, you must understand what's going on behind the listing in order to properly gauge the sellers' motivation level, so you know the best way to attempt a negotiation. With individual sellers, it's a little tough, because there are more variables. However, with banks, we're now seeing patterns of behavior which are setting industry standards. This is allowing experienced buyers' agents to better advise their clients.

This is the first of a series of posts relating to purchasing REOs. There is so much to know and understand that I couldn't possibly put it all into one post. But, if you are considering buying an REO, or if you're an agent finally relenting and jumping in with your buyers, these are posts you won't want to miss.

Stay tuned!

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