FIVE MYTHS ABOUT REO FORECLOSURE PROPERTIES

Seth Peterson
Seth Peterson
Published on November 9, 2018

Bank-owned foreclosed properties (REO’s) dot every real estate market. Oftentimes, buyers have misconceptions about foreclosures, whether that be about the signed offer contract, or the property condition. While certain aspects of the foreclosure sale deviate from the normal sale, they usually do not vary as much as one would expect. Here are five debunked common myths about purchasing a foreclosed property.

Myth #1: Buying a bank-owned property means you’re getting a deal

Don’t get me wrong, there are deals to be had.  But the fact that a property is real estate-owned does not de-value it.  If the property needs repairs, or if it is being sold via auction and no contingencies are allowed, then it might sell for a lower price.  But if a property is in good condition, it is listed on the MLS, and the buyer can have inspection and financing contingencies, there isn’t much reason for it to sell for any less than it would if it were not bank-owned. A house is worth what someone is willing to pay for it. And in Dane County, the statistics show that bank-owned properties do not sell for any less than non-REO properties, at least in terms of negotiated price from the asking price.  According to the MLS, in 2014, Dane County single-family foreclosures sold for an average of 97.38% of list price, compared to 97.33% for their non-REO counterparts.

Myth #2: Foreclosures are not maintained during marketing time

While some properties are not properly maintained during the foreclosure process, once the foreclosure is complete and the property is transferred to the bank or investor, the properties are usually maintained to a “t.” Listing brokers for Fannie Mae and Freddie Mac are expected to visit each property once a week to ensure the property is secure and preserved.  Before a property is listed, it is not uncommon to check the HVAC, roof, or the well and septic system. Emergency repairs are typically done as needed.

Myth #3: Bank-owned properties are likely to come with serious issues

Bank-owned properties come in all shapes and sizes. The stereotypical image exists in the real market: the run-down, dated home that reeks of must and mold. But of course there are plenty of foreclosures that are newer, or had loving owners that kept up their home who fell on hard times.

Myth #4: The transaction process is cumbersome and complicated

Purchasing an REO property from the MLS should not be more complicated than purchasing a non-REO property. Freddie Mac, Fannie Mae and many banks have their own addendums that must be part of the offer. But other than those and a couple disclosure forms, that is all.  So it’s just a matter of reading through the addendum and asking your realtor if you have any questions. Typically no contingencies are allowed beyond the inspection and financing contingencies.  Those contingencies are often in the addendum, so you need to take note if there is a difference from the State Offer to Purchase form.

This all doesn’t necessarily mean the paperwork is more confusing, but rather unfamiliar. Items in the contract though are perhaps more stringent. The bank addendums are typically non-negotiable and have the contingency timelines pre-set. Buyers should expect to close in a normal amount of time.

Myth #5: It doesn’t matter what kind of buyer you are – banks don’t care.

Owner-occupancy is often encouraged and supported by banks. Fannie Mae and Freddie Mac both offer a period of time (typically 20 days) when a property first hits the market where they will not entertain investor offers.  So this gives a preference to owner-occupant offers, at least for the first several days of a listing.  After that deadline is up though, investor-buyers are allowed into the ring.

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