When the economy tanked several years ago, the number of foreclosed-on properties in Massachusetts reached its all-time high. Some properties were sold to third-party buyers at the foreclosure auctions- the lenders reclaimed ownership of the rest.
After taking care of any outstanding liens on the property, going through an eviction process for any tenants still living at the property and bringing the property up to building and health codes, the lender could finally put the property on the market. Purchasing an REO (Real Estate Owned) property does come with certain distinct risks. Any REO buyer should be fully aware of these risks and consider whether or not they outweigh the potential gain that could result from purchasing a valuable property at a low price.
Here are some of the benefits and risks an REO buyer should consider:
The buyer of an REO property could get a great deal. Most of the lenders have in-house REO departments that handle properties the lender reclaims at the foreclosure auction. When considering the asking price for the properties, these departments try to determine the fair market value. However, since these departments have many properties to deal with, they might fail to consider certain aspects that could increase the price of a specific property- for example; the quality of the property’s school system could boost its value. A buyer who conducts extensive research on the property could actually purchase it for less than FMV if the REO department doesn’t realize that many buyers would value this specific location.
No emotions involved. In addition to price negotiations, inspections, and financing, a buyer who wishes to purchase a property from an owner may have to deal with the emotional aspect of the sale. Certain sellers have emotional attachments to their properties and have a difficult time letting it go. Others might have an ideal buyer in mind who they think would be worthy of their house and reject other offers simply based on that. When it comes to REO sales, there is no emotional attachment to the property. The goal of an REO department is to get rid of these properties as soon as possible. The lenders could even entice the buyers to purchase the property by offering low interest financing and low closing fees.
Hope for the best but prepare for the worst. Similar to a foreclosure sale, certain lenders don’t have open houses or allow potential buyers to inspect the house prior to sale. Most of the REO sales are “As Is” and there is little to no disclosure requirements. Thus, an REO buyer is purchasing everything he sees and doesn’t see. An REO buyer attending an REO sale must have an expectation that the property is a “fixer upper.” They should have additional funds allocated specifically for repair costs.
The price of an REO property could be inflated by fees and costs associated with the foreclosure process. The foreclosure, especially in Massachusetts, is a long process and the lender is responsible for all fees and costs including publication costs, Land Court fees, and auctioneer fees. By selling an REO property, the lender is not only looking to get the FMV for the property but also to get back the amount they had paid. The lender could add this amount to the asking price and the buyer will end up indirectly paying the foreclosure costs.