Are REO's the Real Deal for First-Time Home Buyers?

Robin Fenchel February 22, 2012

The buzz in home purchases/sales revolves around distressed properties these days–namely, REO’s or bank-owned homes. If there is one story that peaks a buyer’s interest, it is the REO home market. The reason is simple enough: the buyer believes that REO’s equal great deal or steal. But are bank-owned homes the real deal? Let’s take a closer look:

If you happen to be a first-time homebuyer or a novice in terms of the homebuying process, an REO (Real Estate Owned) home or bank foreclosure requires seeking the assistance of a knowledgable real estate professional. At first blush, the pricing may look enticingly attractive.

In her article entitled “Foreclosure Sales And Pretend Pricing,” Kris Berg of The San Diego Home Blog writes that the “pretend pricing method or (PPM) is an entirely different and oft-mysterious approach to the whole conundrum of determining what the market value really is for a home. Once a lender has foreclosed on a home, the PPM comes into play.”

Foreclosures are often priced 20-30% below a “regular sale”–that is a home that actually has equity in it and is not over encumbered or “under water”, so to speak. That said are REO homes real deals or not? Most home foreclosures are priced way under the market just to create hype. Welcome to the wild west side of the home pricing market. These properties will garner multiple offers with the final sales price often thousands of dollars above the original asking price. Not only does this breed disappointment, disillusionment and frustration among buyers who are looking to own and occupy the property, but these homes typically will sell to the highest bidder who also has a large cash down payment.

As a first-time home buyer, you should factor in whether you will have the time and money to fix up a bank-owned property. These properties more often than not have deferred maintenance issues, missing appliances, fixtures, or have been trashed by disgruntled owners or renters. Remember that bank-owned properties are sold in “as is” condition. The bank need not provide the buyer with many of the disclosures that are normally completed by a seller in the normal course of a home purchase/sale. The buyer is on his or her own to pay for inspections to ensure that the home’s condition is reviewed and verified by licensed and bonded home inspection companies.

It is also prudent to check out the neighborhood thoroughly; how many homes/condos have “for sale” signs. Too many homes up for sale may be an indication that there could be further erosion of prices in the community. Since prices have declined in many of the newly built communities, most of these homes or condos will have fallen back to or below the original prices offered by the builders. Look in neighborhoods that have limited supplies of housing inventory. Also check out the neighborhood’s schools for their ratings. Even if you do not have children or are not be planning to start a family, there is a correlation between high school ratings and housing values. Neighborhoods that are known for their excellent schools will have less price erosion and will see prices stabilize sooner than school districts that are poorly rated.

Remember the old axiom, “Let the Buyer Beware.” Sellers have an obligation to disclose defects, history, and the condition of the property, while with bank owned properties, they do not have any responsibility at all to the buyer except to try to recapture as much of the assets or limit the loss for their investor. Therefore, when searching for a home use caution, utilize due diligence, and do not be rushed into a quick decision or your home purchase may become tomorrow’s REO property.

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