What Is an REO and What Does That Mean For Escrow?
Some homebuyers are intimidated by foreclosed and bank-owned homes because they often require more renovations — and a different type of negotiation — than other options on the market. However, for buyers who take the time to understand the REO process, these homes can be a significant opportunity. Many REO properties come at a significant discount, and, if you are willing to work through some of the nuances of the post-foreclosure market, you can set yourself up for a great deal.
What Is an REO Property?
The term REO stands for Real Estate Owned properties. A real estate owned building is the property of a bank or lender and are for sale to the public. These properties were reverted back to the bank after the homeowner was foreclosed upon. These circumstances may offer you an opportunity to make an excellent investment.
If the home fails to sell at auction, the bank will put up the property up for sale through a Realtor much in the same way a homeowner lists their property for sale with a Realtor when selling their home. The key difference with REO listings is that the bank (or lender) is the seller verses the homeowner as the seller in a traditional listing.
Although REO properties often arise out of the foreclosure process – when a homeowner is unable to make their mortgage payments – the terms “REO” and “foreclosure” aren’t synonymous.
REO status might also be the result of a home being given back to the lender after the previous owner moved out or passed away at the end of a reverse mortgage. If the heirs are unwilling to pay off the mortgage balance, refinance the home or sell it themselves, they can give the property back to the lender or investor.
In order to become an REO property, it must go through these general steps:
- Loan Default. The homeowner/borrower defaults on (fails to make) their mortgage payments for a certain length of time, with the qualifying amount usually specified in the mortgage terms.
- Foreclosure. The lender initiates legal proceedings against the borrower to foreclose on the property.
- Auction. The property is then offered to the public at a foreclosure auction and typically sold to the highest bidder. If the property sells to a third party at the auction, the bank or lender recoups some of the cost of the outstanding loan balance, interest and fees from the sale of the property.
- REO Status. If the home fails to sell at auction to a third party, possession typically passes to the lender and it becomes a Real Estate Owned (REO) property. The lender prepares to sell it, which may involve evicting occupants and removing outstanding liens attached to the property.
Why Buy an REO Property?
There are two reasons an REO property may be of interest to you. One, it might be an easier and cheaper process. Banks do not want to own properties. They want people to pay the loan on the property. That is how they make their money. After not getting payment for a certain amount of time, the bank might be willing to sell for less than market value just to get rid of it.
Here are some of the best reasons for buying an REO property:
- Discounted Prices. When done right, buying REO properties can coincide with a great deal. However, that’s when everything goes right. A quality REO deal will depend on the bank’s asking price and amount of repair work required. The good news is that, unlike in foreclosure auctions, investors can request a home inspection before contract.
- No Outstanding Taxes. The majority of REO properties are sold to investors free of title liens and other outstanding claims. Issues such as delinquent taxes or HOA liens are generally wiped out, helping would-be investors save a ton of money.
- Option For Home Inspection. Along with gathering information and comparable sales in the area, investors should inquire about inspection reports and whether the lender plans to pay for any repairs or sell “as is.” If no inspection reports are available, it is recommended that investors pay to have one completed. The value of a professional real estate inspection is important for two reasons: it will not only provide a transparent layout of the REO property, including current condition and repairs necessary, but it will assist when the time comes to sit down at the bargaining table.
- No Homeowners To Deal With. The final and most favorable perk of buying REO properties is that there is no homeowner to negotiate with. This will help save some serious time during the negotiation period because investors will not be negotiating with a seller with personal attachments to the property but rather a bank that wants to recoup its losses.
How Are REO Sales Different?
- REO Properties are Sold in “As Is” Condition
Banks typically sell REO properties “as is,” meaning the bank will not make any repairs prior to selling. These properties are often in disrepair, so it’s crucial to have a thorough inspection and be prepared to make (and pay for) necessary renovations.
- Perform a Title Search
Most banks will clear a title before putting it on the market, but do not assume this is the case. Hiring a trusted title company can help you find any hidden tax liens or issues with the title of REO properties. Don’t skip this step. The surprise could cost you thousands of dollars in unpaid taxes or liens on the property, and that good investment might not seem like such a great idea, after all.
- REO Properties Take Longer to Close
When you buy a home from a family, the sellers are typically motivated to close in 30 to 45 days since they are also moving and presumably do not want to pay two mortgages. But asset managers at banks often have backlogs of work, so getting everything done may take longer. Although a delayed closing could hinder your moving plans, some bank owned homes move as quickly as traditional sales. Much depends on the local market and the size of the bank.
REO Escrow and Closing Process Tips
Buying an REO (or Real Estate Owned) property is a little different escrow process than your standard home sale. Realtors and buyers need to remember that they are in escrow with a bank/lender (the “seller”) and that the bank/lender has strict procedures in place to follow during the process.
Here are some details to look out for if you are in an REO transaction:
- Escrow is not officially open until the seller has uploaded the contract into the seller’s online systems, it has been signed by both the buyer and seller, and it shows as a “task” in the seller’s online system to open escrow.
- Escrow instructions, preliminary title and commission orders will be e-mailed 48 hours from the receipt of the seller’s fully executed contract.
- Loan documents must be received 24 hours before the buyer’s appointment to sign.
- Expect to wait up to 5 days from the buyer’s signing date for escrow to receive the estimated HUD approval from the seller.
- Once approval is obtained, the file is set to record the following business day after the lender’s funds have been received.
- Funds are usually distributed 24-72 hours after recording. This timing is subject to seller’s approval of the final HUD statement.
What Happens at Citrus Heritage Escrow?
During the escrow period, our title department begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200