It's a Seller's Market if the Home is an REO (Bank Owned) Property

Robin Fenchel February 22, 2012

With the financial markets in turmoil, and with the luster lost in the real estate market, one wonders where the savvy buyer/investor is placing his/her dollars. If you remove gold bullion, and/or stashing your money under the mattress from the safe haven equation, I would say that the REO (real estate or bank-owned) market is currently vying for the home buyer’s/investor’s cash.

I’ve been tracking the REO market here in Irvine for my buyers and sellers. Buyers want to know that if they decide to purchase a home now that their investment is protected from a further market decline. They feel that if they focus on foreclosed properties, then they have, to some extent, a built-in cushion just in case the real estate market experiences further declines. Whether or not this perception proves to be true is still debatable. However, this is the buyer’s/investor’s view of the current state of the real estate market.

On the other hand, sellers want to know how the foreclosure market is impacting their ability to sell their home in a declining and credit-tight real estate market. Equity rich sellers (and there are still some of those out there) who need to sell their home in the current real estate market, are finding that they have to price their property as aggressively as the REOs if they hope to be able to compete for today’s buyers. Even if sellers were to postpone selling their property in the immediate future, foreclosed properties in individual neighborhoods will certainly impact the comparable values of those future sales.

That said there is only about 20 to 40 real estate owned properties on the market at any given time in the city of Irvine–a relatively small number as compared to other south county cities. Those bank-owned properties that are aggressively priced and in an “interior” location (not backing to a busy street/freeway) are selling quickly and on multiple offers–many of which are all cash rather than lender financed.

Personal experience has demonstrated that unless you prepare your buyer for the REO experience, your buyer/investor may be disappointed, and may not be the successful/”winning bidder.” All REOs require that any offer be backed by high credit (FICO) scores, i.e., those 729 and above (and rising) if lender financing is applicable, and verified funds for the down payment and closing costs related to the purchase. Most will require that buyers be pre-approved by the individual bank’s lender of choice. Bank-owned properties are sold in “as is condition,” subject to the buyer’s inspection rights. What you see or what the inspectors find is what you get or choose not to get. If the costs of repair are prohibitive, the buyer need not continue with the purchase.

However, be aware that some of these foreclosed properties have deferred maintenance or are in need of repairs–the cost of which should be taken into account by buyers who are not contractors or who may not have easy access to one (i.e., a family member who can help refurbish). Also understand that the bank, who has already taken a huge loss, is not interested in the buyer’s list of repairs/requirements.

The REO properties in which I have personally been tracking have been sold at or above the asking price with little or no repairs being made. This may also include termite damage. A bank may provide a Termite Report, but may require the buyer/investor to cover the cost of any or all of the repairs. Other items for which buyers may have to pay include Association transfer and or document fees, and any other fees the bank chooses not to cover. These may show up in a lengthy addendum that the bank furnishes to the prospective buyer(s). Be aware that the bank/seller does not sign on any documents until there is full agreement by the buyer(s) with initials/signatures on all the paperwork including the bank’s addenda.

A striking example is one in which my partner and I previewed on a Sunday evening a week ago. It was a 3 bedroom, 2 bath single family residence on an interior corner lot of over 5,000 square feet in an established Irvine neighborhood. Upon entering, we discovered that the home had been vandalized to the extent that windows were broken, appliances were smashed, and holes were put through walls throughout the homes. We immediately phoned the bank’s agent to advise him of the state of the home. A return phone call the following day revealed that the listing agents were well aware of the vandalism (sadly it turns out that the irate homeowner who lost the home had unleashed a blind rage resulting in the destruction throughout this one-time upgraded and cared for home). The bank, however, we were told, would not be making any repairs except for the broken windows and would not be responsible for approximately $7,000 in termite damage that a recent report had revealed. However, no worries, there were already several offers, a few of which were all cash, and the property was going to be placed in “back-up” status that very day. Why would there be multiple offers on a home that someone had taken a sledge hammer to? One reason might have something to do with the fact that it was a single family home on a large lot in a good location within an established Irvine neighborhood that the bank had priced under $500,000! The other reason might have to do with the REO fascination factor: namely, buyers perceive properties that are tagged as “bank-owned” to be where the “great deals,” are whether they ultimately cost the buyer more in the long run in out-of-pocket fix-up costs.

On Saturday, I previewed a 3 bedroom, 2 bath single family residence in an adjacent neighborhood which was also in need of some repairs. However, it was in a good, interior location on a large lot. Yesterday, I brought back a potential buyer. Within minutes of my arrival, several more real estate agents some of whom had brought their prospective buyers with them arrived. By the time I left the property with the buyer to whom I had showed the property, there were agents and buyers lined up outside the front door waiting to go in! Today, Monday, upon checking the availability of the property, the agent representing the bank already had two offers in hand, one of which was all cash over the asking price and offers were still coming in! Why all the activity? Again, simply stated an apparent strong demand for a single family home in Irvine on a large interior lot aggressively priced at under $500,000, and a plethora of ready, willing, and able buyers–some of whom have ready cash.

A similar multiple offer situation occurred on an Irvine four bedroom former model home price in the upper $600,000 range in which there were four all cash offers in addition to several others structured with lender financing. The listing agent for the bank came back to only the four all cash offers (they didn’t even consider the ones that required financing), with a “best and final price.” The home ultimately sold above the asking price to the highest and best bidder.

What about the higher end properties–above $1,000,000? These too are receiving multiple offers, and the successful buyers are the ones that are either purchasing with all cash or those who are financing only a small portion of the overall price of the home. Buyers who are trying to negotiate off the listed price, and/or those who need conventional financing seem to be considered if the all cash buyers do not show up. But show up they do, and they are the ones that are the successful buyers/investors–at least for now.

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