REOs--do I want to attempt this?
December 16, 2009 12:48 PM   Subscribe

What's it like purchasing a REO? Is this something I should attempt as a first time homebuyer?

I have 20% down, good credit, and am preapproved for a decent loan. I also lack a deadline on purchasing a home--that is, there's really no hurry to move out of my current place.

I am looking for a home the conventional way, but am also wondering about REOs. Are hunting for REOs and bidding for them worth my time? How do I even start? Any stories you'd like to share? Do I even want to attempt this as a real estate newbie?
posted by thisperon to Work & Money (11 answers total) 3 users marked this as a favorite
Do I even want to attempt this as a real estate newbie?

Generally speaking, if the thing you want to do is something you've never done before, involves the investment of a large amount of money, and you've been unable to dig up books/mentorship or other instruction on the subject, it's not a good idea.
posted by davejay at 1:00 PM on December 16, 2009

In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property.

Put your 20% down, get a nice rate, tax deduction, first time homebuyer credit, and have fun in your first house. You'll be busy enough.
posted by fixedgear at 1:03 PM on December 16, 2009

Long and frustrating and a lot of work, frankly. Did you grow up renovating homes? Do you like feeling like you're camping in the house you just bought? Do you have a cash reserve beyond that 20% that you can use to cover necessary repairs?

I just purchased one under a FHA low-down loan because my credit score isn't the best in the world. (An old collection knocks 30% off of it.) The house had been rented for a few years, was repossessed by the VA and didn't sell at auction. When I made an offer on it, it had been unoccupied for at least two months. Initial inspections discovered that the chimney had a few issues that shouldn't be too bad, the house was good structurally but needed remedial drainage work around the foundation immediately, and that there was an active termite infestation in the front flower beds. The plumbing was good but all of the faucets and valves leaked and would need to be repacked or replaced, and the house in general had not been updated.

Random observations besides that:

Because I was buying with an FHA loan, I didn't have to pass a bunch of the usual requirements, but did have to have an appraiser pass judgment on it. The appraiser forced a few stupid fixes -- and I was lucky that the VA wanted to get off this house and was willing to put a couple grand worth of easy fixes (termite treatment, handyman for a roof problem, etc.) into the house. Most banks are not so willing.

The buying process was long and drawn out and took two months from offer to closing. It took 2-3 days any time we needed a contract amendment or approval for something. It was definitely a hurry-up-and-wait sort of experience, because they demanded I get paper back to them the same day but took their sweet time with their own stuff.

All in all, it will be a great first home and I love it to death even though it's a pain in the butt. However, I also recognize that most people aren't willing to put the amount of work into the home that I'm going to put in. (For instance, we just started replacing the fence last weekend. That will be a $1000 and 5-weekend chore. Don't get me started on how much I've spent at Home Depot in the past two weeks.) My parents bought houses that were in poor condition for my entire youth and renovated them, though -- one of my earliest memories is helping my dad pull nails out of walls as we removed paneling from the family room of a house. At four years old. If that doesn't sound like you, then you probably don't want to buy something that's on an REO.

Back on the other hand, it hasn't been touched, which means it hasn't been screwed up. I can easily fix things that have fallen into disrepair -- but it's difficult for me to undo things that were done incorrectly. A few of the houses I looked at had been 'flipped' in such a destructive and nonsensical way that it would be easier to knock the house down and rebuild it than it would be to fix the damage that the "renovations" caused.

This varies geographically as well. My sister has been trying to buy a short-sale in the San Fran bay area and has been in and out of contract for six months and has lost about five thousand dollars in inspection fees and other costs.
posted by SpecialK at 1:04 PM on December 16, 2009 [1 favorite]

fixedgear: I think that by REO, he's meaning post-auction -- as in, the house failed to sell at auction and is now listed through an agent with the bank as the registered owner.
posted by SpecialK at 1:05 PM on December 16, 2009

SpecialK, thisperson: my mistake. The rest of my advice still stands.
posted by fixedgear at 1:08 PM on December 16, 2009

As SpecialK indicates, your bargaining power with REOs tends to be pretty limited. Properties are basically sold "as is," and while the bank has an incentive to unload them, they have no incentive to either 1) negotiate all that much on price, or 2) be flexible about the terms of the closing. You are buying the property as is.

Another thing though: the bank frequently sets its price by how much it had left on the mortgage for which the house was collateral. In years past, this frequently meant that getting houses with REO status could be a fantastic deal. Today, with all the sub-prime lending and jumbo-mortgages, you can actually find REOs that are over-priced, because the amount left on the mortgage is more than the property is actually worth. The bank doesn't want to take too much of a bath on this, so it's going to be less willing to part with its collateral for a bargain basement price than it would if it foreclosed on something 20 years into a 30 year mortgage.

If you can find something which is an absolute steal, I'd say seriously think about going for it. But we're talking at least 40-50% less than you'd expect to pay for the property if it weren't distressed. You're likely to spend the difference in renovations and repairs, and it can be hard to tell before you close.
posted by valkyryn at 1:32 PM on December 16, 2009

and it can be hard to tell before you close.
This is very true. After I closed, I found out exactly how bad the fence was (replace NOW) and how bad the chimney leak is (there's a tarp over the cap right now) ... both were worse than I had initially thought and are fairly significant expenses to repair if you don't have the skills and access to equipment to do it yourself. Luckily, I do. I might still end up losing the chimney; this is not that big of a deal to me because I can either build a stove/box chimney instead of the brick monolith, or convert that side of the house to have french doors. Again, these are things that I have the skill to do that your common first-time homeowner would not.

In my case, I bought about 20% below value, and I will definitely spend that much in repairs. But in my market, I would have *anyway* to make the house 'mine', so I figure I'm still getting a deal... I'm just doing different things.
posted by SpecialK at 1:53 PM on December 16, 2009

Good questions! I've been looking at a bank-owned property that is in real disrepair (not lived in for over a year) that I can get at less than 50% of the cost, but I've had some of these same questions. Is it worth trying to tackle such a large project? This one will probably need to be gutted to the studs and renovated (electrical and plumbing are gone and the roof has caved in due to water damage; may also have mold issues), so I'm weighing if the price is worth it. I'll be watching this thread for more thoughts and ideas. Thanks for posting thisperon!
posted by garnetgirl at 6:52 PM on December 16, 2009

Garnet: At that point, it's probably easier to just demo (or deconstruct/salvage) the entire structure. You won't get out of it what you put into it, and it will take several months of consistent work to make the existing structure weather-tight enough to the point where you can take time off... or even perform mold abatement. Unless the structure has historical or sentimental value, the only reason I'd buy something in that bad of condition is if I could get it for land-only value.
posted by SpecialK at 9:00 PM on December 16, 2009

Do I even want to attempt this as a real estate newbie?

Probably not. The only scenario that might work for you would be a two-flat or duplex that you could live in while renting the other. Friends of mine did this, using parental money to cover the down payment, and it worked out pretty well for them. They got tenants through their NPO and church network and never had a problem.

But if you don't know what you're getting into you could potentially take a real bath. Noted all above as well as the fact that experts generally agree residential real estate in the US hasn't quite hit bottom yet. You can't count on the property as an investment that will appreciate, and in the first few years you'll be clawing equity away in what seems like piles of pennies. Meanwhile you'll have all the headaches of landlording including the furnace that dies when you are least able to afford replacing it, the frantic tenant call past midnight over a plumbing disaster, and the tenants who leave in the dead of night two months past due or gift you with a trashed apartment piled high with junk. Then there's the responsibility to take the single mom with three kids to court if she isn't paying you a dime and isn't budging on her own.

This is a potentially rewarding way to spend your time and money, but you shouldn't be too optimistic about getting rich anytime soon, and it's not for the squeamish.
posted by dhartung at 1:25 PM on December 17, 2009

Response by poster: Thanks for all the answers, everyone. Given that I have little experience with either renovation or real estate law, I think I'll pass on these REOs. Unless a really great deal comes along...right? RIGHT?!?!


Thanks again.
posted by thisperon at 1:05 AM on December 18, 2009

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