What Kinds of Problems Do REOs Have?
The problems with REOs are usually far less than for other repossessed property, but they do exist and can be severe on occasion. Frequently, the lender will pay for a policy of title insurance and will guarantee that your loan is indeed a first (no hidden liens) and that the title is clear.

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It’s up to you to investigate the property thoroughly, usually before you make your offer. Know what you’re buying. After the purchase you’re probably stuck with it.

You are nevertheless buying a property that you must now take responsi¬bility for. Frequently, these sales are “as is.” This means that if the property is sliding down a hill and is about to be condemned, it could be your prob¬lem. If there’s a tenant who won’t pay and won’t get out, that could be your problem too (although you could negotiate with the REO officer as a con¬dition of your purchase that the property be vacant when you take owner¬ship). If the property has termites, the lender may not correct the problem.

You may intend renting the property out (instead of buying and quickly reselling). You should do your homework to see that the potential rental income will cover the mortgage payments, taxes, insurance, and other costs.
In other words, the problems with REOs are usually the same as with buying any other investment property. Buying it from a bank usually but not always, means that you’re getting a fairly clean deal. Just because a lender is an institution doesn’t mean, however, that it’s looking out for your interests. You have to keep your eyes open and your mind alert in all real estate transactions.

Are REOs the Best Deals Around?

What’s best for one person may not be right for another. REOs tend to be the cleanest deals around. Since they’ve already gone through the foreclosure process, many of the problems associated with title have been cleared up. Usually, but not always, the lender will give you clean title and a policy of tide insurance. In addition, many times the prop¬erties themselves have either been cleaned up or the lender will give you a clean-up allowance.

As a result REOs are frequently good bargains for the hunter who doesn’t want to work too hard. The downside is that REOs often don’t afford as big a bargain in terms of price (and profit) as some of the other opportunities in foreclosure.

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Be sure to thoroughly check out the property through a professional inspector) so you know what you are getting. Pay special attention to hazardous problems such as lead, asbestos, and black mold, as you may be responsible for a later expensive cleanup.
 
Many investors begin their search for REOs in HUD repos. The Department of Housing and Urban Development (HUD) takes back homes that were insured by the Federal Housing Administration (FHA) and lost to foreclosure. Although technically these are REOs, they are commonly called HUD repos.

The FHA insures low down payment (3 percent) mortgages to those who qualify (the mortgages are offered by conventional lenders, such as banks). However, because the down payment is low, the buyer has almost no equity in the property. Thus, if times turn bad before the property has appreciated much in value, the borrower has great difficulty in reselling. Frequently, there isn’t enough margin to cover the sales commission for an agent. Thus, a good many of these buyers default on their payments, and the lenders eventually foreclose. As part of the foreclosure process, HUD “buys” the properties back from the lenders. At any given time, there may be tens of thousands of homes nationwide owned by HUD and obtained in this manner.

Because the maximum FHA loan is fairly low (the amount varies from area to area), the properties are typically moderate to low in value. These are often homes in modest neighborhoods. Some are in slums, but most are in blue-collar areas.

HUD disposes of the property through a program administered by regional property management companies. In California and parts of the West, for example, as of this writing the program is handled by Golden Feather Realty Services. In the Midwest it’s First Preston. In New England it’s handled by CitiWest.

However, you do not need to contact these property managers directly. Rather, purchases are handled by any local real estate broker. You go through a broker, who submits your offer to HUD, (HUD pays a real estate commission to the successful broker of up to 5 percent.)

HUD, as the seller, is only interested in what it will “net” out of the selling price. Remember, it has to pay a commission, and given there are some closing costs. This is important to keep in mind when making your offer. Because there’s a broker involved HUD will net significantly less than you offer. For example, if you offer $120,000 on a home, the net to HUD may be less a 5 percent commission and less S1000 in costs. On the other hand, another offer may come in from a broker asking only a 4 percent commission. That’s S1200 less in commission but §1200 more net for HUD. For this reason your offer may not be accepted, even though the property is sold for the same price to someone else. Pay atten¬tion to what HUD receives as well as to what you’re paying.

HUD typically goes through two “offer periods.” The start and end of the first are normally well defined, and your broker can find out about them for you.

The first offer period is basically for “priority bidders.” These are peo¬ple who want to live in the home. Anyone who is willing to be an occupant is given priority. Only if there are no owner-occupant bidders are offers from investors such as you considered.

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Only licensed real estate agents can present your offer.

Sealed bids are presented to HUD during the offer period but are not opened. Only after the offer period has expired are the sealed bids opened. And assuming there are qualified buyers, HUD will basically accept the highest net offer. (Remember, that’s the offer that yields it the highest price.)

On the other hand, if there are no bids, which sometimes happens, then it’s investor time. You may now submit an offer at any time, including
 
weekends. Your offer will be opened as it is received, and if HUD determines that it can live with the net you’re presenting, you’ll get the house. Typically, the broker of the successful buyer will be notified in 1 to 2 days. On the other hand, if there are no offers HUD likes, it can wait, try a new offer period, or even on occasion go back to earlier offers that it had received but not accepted.

Tip
In some areas, if you’re a teacher or a police officer and intend to move into the home, you can get as much as 30 percent off the price.