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REO’S: Friends or Foes?

Buying
The Pros & Cons of Buying a Distressed Property

My best friend recently took the plunge. No, not the one with rings and frosting. The plunge into that hazy, stormy black hole we so sweetly refer to as  {drum roll}  the housing market.

The result? Several midnight phone calls. Frantic calls, euphoric calls. Mostly frantic calls. But my favorite one, hands down, has to be the one about the Oreo.

“Kris,” she gasped, “We found it. For real this time.”

“That’s great, Liz,” I mumbled, wiping the dust off of the blinking 12:17 a.m. on my bedside clock. “So are you going to—”

“But I don’t know what to do!” she wailed. “It’s an OREO.”

I cleared my throat and rolled back onto the pillow. “You’re moving into a cookie?”

Not exactly. Which begs the timeless question: What are OREOs really made of?

 What is an OREO (REO)?

An OREO, more commonly known as a REO, is a property that has been repossessed by a bank or lender. The acronym stands for “Other Real Estate Owned,” or just “Real Estate Owned” without that first “O” tacked onto the front. And let’s face it: any house with the word “repossessed” hovering in the shadows of its history is going to come with some natural suspicion attached to it.

But are all REOs as scary as they’re made out to be? We’ve put together a list of Pros and Cons to help you navigate these sometimes tricky waters.

 THE PROS

Hot Potato: The bank or lender responsible for the REO house you’re eyeing probably doesn’t want to keep it long. Why? They’re responsible for the upkeep on that property as long as they’re holding onto it. And upkeep can cost a pretty penny—a couple thousand dollars a month, in some cases. More often than not, these banks are eager to sell; and eager sellers tend to be the ones who are most willing to give you a good deal.

Bang for the Buck: It’s very common for REOs to be in need of some TLC. And hey, some of us don’t want to hear about varnish unless it’s shimmering from the tops of our newly polished fingernails. But for the DIYers out there, picking up an REO can not only be the blank canvas you’ve been looking for, it can also be a great investment. You’re bound to turn a profit on the place when you sell it later. Which, of course, will put some money in your pocket for the next time you feel like rolling up your sleeves.

Spit n’ Polish: Even though a lot of REO properties tend to be run-down, look twice before you leap to that assumption. In some cases, banks will rehab properties to get them up to code before they sell them. And since the lender still wants to get the newly revamped REO off his hands fast, the lucky – and savvy—homebuyer who catches wind of one of these little beauties may very well be able to have her cake and eat it, too.

[No] Monkey in the Middle: Some banks have their own real estate agents who manage REOs for them, and when this happens, the middleman is staying put. But bank-agent alliances aren’t always standard form. If the bank handling your prospective REO is doing it directly, then you stand to save thousands of dollars in middleman fees. Moreover, setting up your mortgage with the same bank that sells you the REO has been known to land home buyers a lower rate. Not only do you get a cookie, it’s double-stuffed!

 THE CONS

One Man’s Trash: The thing to remember is that REOs don’t go straight from the previous homeowner to the bank. Usually, they’re what’s left after foreclosed homes have been through the auction process, and we all know the kind of item that usually gets left behind at auctions. Do you sometimes find an unexpected treasure lying in the gutter? Sure. Do you {much} more often find half-corroded bottle caps and other such unsavory artifacts down there? You bet. So keep a sharp eye, and do your research.

The Bad and the Ugly: Although not all REOs are duds, they have their reputation for being run-down and abandoned for a reason. The people who lost the homes in the first place couldn’t afford their mortgages, which means they probably weren’t able to afford upkeep on their places either. And while rehabbing by the lender isn’t unheard of, it isn’t all that common either. So if, like yours truly, you prefer to apply your varnish to fingernails instead of floorboards, buying REO may not be the best fit for you.

No Disclosure: Ah, the disclosure form: that handy list that tells you at a glance every known mechanical defect of the home you are about to buy. And alas, REOs don’t come with these. Bottom line? Don’t forget the home inspection!

What Goes Around: Before the days of the busted-bubble market, it was standard for banks to own REOs for cheap. Nowadays, things are different, and REOs have been known to burn holes in the pockets of more than a few lenders, thanks to the expenses of the foreclosure process and monthly maintenance bills. The hot-potato rule still stands, but beware: it’s definitely possible that your lender is willing to suffer some minor potato-burns in hopes of recouping some of his costs. To wit: good deals aren’t necessarily default with REO properties.

Liz didn’t end up buying her “Oreo” house. It turned out that something a little shinier came on the market; a great place that was also closer to her office. But I daresay we are both the wiser for the week of mad research that followed that 12:17 a.m. phone call.

And I brought a package of sandwich cookies to her housewarming party.

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Kristine Serio
Kristine Serio is an editor and writer with Author Bridge Media. Her real estate roots stretch back to her grandfather, who launched a profitable second career as an investor during the 1950s. She is now passionate about empowering women through real estate writing. Her authors and entrepreneurs have been featured in The New York Times, O: the Oprah Magazine, and the San Diego Union Tribune.
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