REO's

What is an REO?

REO stands for Real Estate Owned and that means property already taken back by a lender. They are not the same thing as a short sale, or a home in forclosure or a home under a Notice of Default (NOD). An REO has already been through the full legal process and the home is the proud possession of the holder of the note. This is an important distinction.

A home in foreclosure, default or NOD is still the property of the borrower. If a borrower removes a dishwasher and sells it to pay for food, there could be civil action for harming the eventual lender's property. However, after it becomes corporate owned, an REO owned by the lender, removal of the dishwasher is theft, even if taken by the former owner.

Another term often interchanged with REO is Corporate Owned, but they are not always the same thing. An REO is specific to properties taken back by a lender. Corporate owned properties can be bought at auction. What auction, you ask? Let's look at the Foreclosure process.

Foreclosure Process

Before a lender even begins, the borrower is usually 60-90 days behind in their payments.

We need to get something straight here. Lenders don't do the dirty work. To protect consumers from predatory lenders, the State of California uses a Deed of Trust to secure real estate loans. That means that a Trustee will have to file all the notices and complete the foreclosure.

New law requires that the lender deliver a 60 day Notice of Intent fo file a Notice of Default. After 60 days, the trustee will post a Notice of Default on the front door, indicating that the borrower has 90 days to bring the loan current. 90 days later the foreclosing trustee will post a Notice of Sale, giving the borrower an additiopnal 21 days to bring the loan current or pay it off (yeah . . . right). The Notice of Sale must also be published in a periodical of general cirulation. Thhirty days after the Notice of Sale is posted, the property is sold at a Sheriff's sale (auction), usually on the courthouse steps or some other easily identifiable public place. The auction wipes out all other debt behind the foreclosing lender including liens, tax and otherwise and junior lenders (second trust deed). The only thing foreclosure does not wipe out is property tax.

Homeowners Beware

There are many scam artists preying on unfortunate borrowers in foreclosure. Please be wary. Click on the Homeowners Beware icon to the left to read a publication from the California Association of Realtors regarding such scams.

Let's Make a Deal

Many people think they can get a good deal bidding on properties sold at the courthouse and they may be right. Unfortunately you have to be able to deliver a cashiers check for the full purchase. Not too may of us can do that.

There is a better opportunity to buy prior to the auction, while the property is in the Notice of Default phase. In years past, even in good real estate times, there were foreclosures. Some of the properties foreclosed actually had equity. In those types of transactions, buyers would swoop in, offer a couple thousand dollars to turn over the keys, and sometimes people did just that. Due to the potential for financial abuse, California has some very strict rules regarding buying while in NOD. Agents have to use special purchase forms called an Notice of Default Purchase Agreement (NODPA) and must give a five day right of recission. In times where values are falling rather than rising, there are fewer of these.

Properties purchased at auction by investors are Corporate Owned and are most often repaired and flipped.

REO's can be a good deal. Either they have been fixed up to be very marketable or they are totally unfinancible, making them a good deal for investors and people with a tool box. The first determination to make is which kind of buyer you are. If you want to finance using FHA (90% of all buyers in 2009) you will have to make offers on properties suitable for FHA. Homes with exposed wires, missing light or plug covers, tears in carpet or flooring that pose a tripping danger, in short anything that poses a safety and soundness issue probably will not pass FHA muster.

FHA properties, as indicated above, tend to be the most popular and therefore will go the quickest. Those in good repair and well located are likely to sell in mere days with multiple offers. Those in disrepair or poorly located will sell slower, but eventually they will sell. Lenders have to sell, but recent restrictions in teh foreclolsure process have slowed both foreclosure itself and eviction, the removal of former owners from the property.

Eviction - Cash for Keys

When a lender completes a foreclosure and becomes the proud owner of their new REO, what happens to the former owner occupant? The former owner or any tenant living in the property immediately have the same rights as any other tenant in the State of California excepting laws requiring just cause for eviction. Foreclosure is cause for eviction whether known by the tenant or not. Tenants and former owners must be given 30 days notice prior to commencement of eviction. Tenants who have been in the property twelve months or more must be given 60 days.

Lenders will often offer money, Cash for Keys, to bribe the tenant or former occupant to leave voluntarily. This is not because they are kind-hearted, though some clearly are, it is because it is cheaper for them to do so. The eviction process can take 60 to 90 days and up to 180 days if a bankruptcy is involved. It is cheaper to offer cash and get the property to market quicker than to wait it out and pay legal fees. This is particularly true in a declining market where values are dropping by as much as 1% per month. Typically when Cash for Keys is offered, the property must be left in good condition, with all appliances that were there left in place, the yard cleaned up, the garage empty and the house left in broom clean condition (no junk anywhere - everything must go). The value of Cash for Keys changes dependent on the lender. Most will offer around $1,000 though some offer less and some much more. Some lenders will not offer Cash for Keys to former owners.

Eviction is a California court process in which the owner/landlord must follow strict procedures or risk the wrath of a judge.

Unlawful Detainer is filed beginning the process. The tenant is given five days to respond and if no response is received or the response does not provide legal rational for stalling eviction, the tenant generally must be out within 20 days after said response is received by the judge.
Writ of Possession is granted usually giving the tenant five days after issuance to vacate. The sheriff accompanies the owner's representative to the property and conducts a lockout, physically removing the occupant if required. A lockout notice is posted on or in the property and the tenant may not return unaccompanied by an onwer's representative without breaking the law.
Bankruptcy can forestall the process for a short period of time.

Recourse or Not

The State of California has a single action rule which means, in a non-recourse transaction, the lender can either come after the property or come after the borrower, but cannot do both. Purchase money loans and loans strictly for home improvement are non-recourse. Cash out refi's, where you bought a new pink Caddie and went to Vegas to see Elvis impersonators, or any other purpose, trigger recourse. Loan application fraud, investment properties, and trust deed secured business loans also will result in recourse, a 1099 or both. If they can come after you will they? Can you get blood out of a turnip? Some lenders will try, some are more realistic, but in theory they can on recourse notes.

Abandoned Personal Property

More often than not a tenant or former owner rapidly vacated has more stuff than space. There are very strict rules regarding the personal property left behind. These rules also apply to new home owners finding personal property left behind by the seller (a fridge in the garage or pool table in the family room).

Real property is anything that would normally be affixed to the house or yard, like trees, below ground pools, light fixtures, dishwashers, stovetops, ovens (except freestanding). Personal property is pretty much anything else.

The former occupant must be given an Abandoned Personal Property Notice, posted on the front door of the vacated property. This notice gives the former occupant 15 days to reclaim the property.

There two seperate directions to go dependent on relative value of the personal property left behind:

If the personal property left behind is worth more than $300 it must be sold at public auction and the monies received, less the cost of liquidation and storage, is turned over to the county and may be reclaimed by the personal property owner within one year.
If the property is worth less than $300, the owner may dispose of it at their discretion after the 15 days.
Value of property left behind is generally yard sale value.

Flip Rule

To avoid the potential for investor abuse, the Federal Housing Administration (FHA) adopted rules which make buying and immediaetly selling properties, flipping, more difficult. FHA, by the way is the only one who cares about flipping. The flip rule states that an offer to purchase may not be made on a property until after 90 days after the property was foreclosed when using FHA financing. This is why many corporate owned listings warn about FHA offers for the first few months of the listing. The flip rule was temporarily suspended in May of 2009. Many lenders still require dual appraisal if the property has not been held a minimum of 90 days. New rules have reinstated flip rules.

REO Offers

REO's are already a good deal. They are generally priced and repriced every thirty days reflecting the comparable value of like properties. REO sellers relying on agent BPO's are likely to be closest to market while those priced by appraisers tend to be less reflective of current value. Value is always an opinion and some people will have a higher opinion of value than others. It is art, not science.
You will not be able to get the property for 50% of value. Current stats show REO properties trading at 99% of asking price. For properties priced correctly, good offers will be at asking price or slightly higer, less up to 3% buyer credit. Asking for more buyer credit than that could kill your offer.
Well priced properties in good condition, in good locations will go for more than asking price and it is likely that they will go on a competative highest and best offer. Highest and best is when there is more than one good offer. The seller will request that all parties take their best shot. The lender gets to choose from amongst them.
If the selling lender is known, get a prequalification (prequal) from the selling lender. Sometimes this is even a requirement and it is not a violation of any law. Prequal is okay. REQUIRING that you book your loan with any particular lender as a condition of sale, is a violation of RESPA.
Appraisal is the best reason for prequalling with, and perhaps even using, the selling lender. Appraisals often come in low. Few buyers have enough cash to make up the difference, and even if they do, probably don't want to. The selling lender will have a choice of lowering the price or killing the deal. As long as the appraised value is reasonable the lender will usually elect to lower the sale price instead of extinguishing a good offer, especially when applications are with them.