Irvine Real Estate Link, CA – REO properties vs. foreclosure

by Robert Mack on September 3, 2008

in Irvine Real Estate

An REO is a foreclosure-gone-bad. This is how I see it. The acronym stands for Real Estate Owned, which really doesn’t convey the true meaning of the term. In fact an REO is a real property that is now owned by the bank, or the mortgage company or the financial institution after an unsuccessful foreclosure sale attempts. Perhaps it should be called BO property—Bank Owned? Or perhaps FGB—Foreclosure Gone Bad? That, however, is beside the point. Let us stick to REO. I was just thinking aloud.

When a property is foreclosed, the financial institution puts it up for auction. The starting bid for the property normally begins at the sum of the loan balance plus any liens plus major repair costs plus over-due fees plus any costs that may set back the bank, will be included in the minimum starting bid amount. There are times that the bank puts up the property for auction ‘as is’. Meaning possible repairs, possible legal claims on the property including legal fees, even living-in tenants will be left for the successful bidder to deal with. The bidder or the potential buyer doesn’t know any of these – Read a true situation.

Normally foreclosures in Irvine are quite attractive and sometimes mouth-watering, and I must say, in a number of cases, the properties are quite attractive for their asking prices. But the coin has two sides; bidding blindly may be hazardous to your pocketbook.

Now that the financial institution has failed to receive a bid during a foreclosure auction, the property reverts back to it [the financial institution]. That is, the bank owns it. In effect, the sale of the property now will resemble a normal sale, as though an owner is selling his/her property. The buyer has the opportunity to inspect the property, do a pest inspection, appraisal, ask the bank to make necessary repairs, make offer and counter-offer and normally go through the same traditional home buying routines, with ONE BIG DIFFERENCE! A seasoned Irvine real estate purchaser asks the million-dollar-question: Why has this property become an REO? Is there anything wrong with it? Why have the potential buyers shied away from it?

The answer to this question maybe two-folds:
1- The property is a lemon (normally the case, or a potential money pit)
2- The property is grossly missed and overlooked (highly unlikely but possible).
The Irvine real estate purchaser of an REO, therefore, must do his/her homework thoroughly.

Because the lender is selling the property as an REO and provides the buyer with the opportunity of all inspections, an REO sale price is competitive and close to the current market value and the buyer’s offer should not deviate grossly from it. But remember to ask that million-dollar question, anyway.

Also, a slight point of leverage the buyer may have is the fact that the bank desperately wants to unload its REOs. They are like thorns on their sides. They may not show it but you, as a buyer, must know it, and also let them know that you know it. And, with a bit of good luck and a lot of homework, you might have the deal of the decade.

A brief statistics:
As of 09/03/2008 Orange County’s inventory on real estate foreclosures and auctions are close to 6,000 units (homes, condos, townhouses, etc.). And as of the same date, Irvine foreclosures and auctions tops 250 units (slightly over 4%).

Views, comments, responses and constructive criticisms are welcome.

Make it a great day.
The Mack Team
Robert & Tania Mack
Century21 Professionals
Irvine, Orange County, California

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