| When a property is sold through a foreclosure auction, | | | | management of such properties is a headache they |
| its owner usually owes more to the lender than the | | | | would rather not have. |
| market value of the property itself. This is often a | | | | However, banks are very sophisticated when it comes |
| barrier to selling the property, and sometimes such | | | | to managing REOs and foreclosures, often having a |
| foreclosure auctions do not draw any bidders. As a | | | | department dedicated to them. The selling process |
| result, not many foreclosure auctions end with the sale | | | | starts when a potential buyer makes an offer to the |
| of the property, rather the title reverts back to the | | | | financial institution, which is gone over by its |
| financial institution holding the lien. Properties in this | | | | management. Often, the institution will make a |
| category are referred to as REO (Real Estate | | | | counteroffer, and the buyer may respond with another |
| Owned) properties. | | | | offer. After they have agreed on the price, terms, and |
| After the bank takes possession of the property, the | | | | conditions, a contract for the sale can be made. |
| mortgage loan disappears and the financial institution | | | | When preparing to make an offer, a potential buyer |
| deals with any items owed by the prior borrower, such | | | | needs to look at what comparable properties in the |
| as homeowner association fees. The financial institution | | | | area are worth, along with the cost of any needed |
| also tries to get the IRS to remove any tax liens | | | | repairs. Financial institutions usually sell such properties |
| against the property. The current owners are usually | | | | as-is, which makes the buyer's inspection even more |
| evicted and often repairs are made to damage on the | | | | important. If they discover damage that they did not |
| property in order to make it more attractive to | | | | anticipate, which the institution will not repair, they can |
| potential buyers. | | | | then cancel the transaction. |
| The best parts of buying a REO property are that | | | | Investors dedicate much to buying REO properties in |
| buyers have significant leverage and may be able to | | | | terms of funds (often cash), work, time, and effort, |
| turn the property around quickly, making money by | | | | thus the price needs to be far enough below market |
| speculating on above average returns. Banks are | | | | value to justify the risk. Foreclosures are properties |
| trying to get the maximum return when they sell an | | | | that already have had problems that often include tax |
| REO property directly. They want to sell them quickly | | | | issues, a lack of maintenance, substantial repairs, and |
| for two main reasons: first, they don't want to tie up | | | | often needed improvements that cost a significant |
| their money in capital reserves they are required to set | | | | amount of money, and any investor looking to buy |
| aside for a foreclosed property, and second, the | | | | such a property needs to keep this in mind at all times. |