Foreclosures vs. REO’s

foreclosure is a property a borrower has stopped making payments on and, as a result, has reverted to the lender. Because Georgia is a title state, a security deed which conveys title to the lender accompanies the note of indebtedness or promissory note. (At the time a borrower pays off the mortgage, a defeasance clause obligates the lender to relinquish title to the property.) Therefore, when a borrower does not make his mortgage payment, the bank can foreclose on the property without taking the borrower to court to get access to the property. The bank already has the property title and can sell the property at auction to satisfy the debt. The bank has to advertise the foreclosure sale in the newspaper once a week for 4 consecutive weeks before auctioning the property. In Georgia the public auction occurs on the first Tuesday of the month, on the courthouse steps. Bidders have to have a cashier’s check in hand in order to win a bid. Some auctioneers will give you an hour to bring a check for the amount of the winning bid. The auctioneer opens up the bidding with a minimum bid which includes the loan balance, accrued interests, attorneys’ fees and any other costs associated with the foreclosure process. There are 4 disadvantages to buying a foreclosure home:

  1. You can see the property from the outside but cannot enter it to see what kind of damages may be found inside. You will be purchasing the property “as is,” without knowing what “as is” means.
  2. You must have the full amount of the winning bid in cash.
  3. Someone may be living the property and it will be your job to evict them.
  4. There may be other liens against the property.

An REO is a property which did not sell at auction. Most foreclosure properties do not even result in bids. The starting bid is too high for investors looking for bargains, or just too high for what the property may be worth in the current market. From the foreclosure sale, an unsold property reverts to the bank. Now it is an REO, real estate owned property. The bank will list the property with a real estate agent to be listed in the regular Multiple Listing Service, like any other property listed with an agent. There are 5 advantages to buying an REO:

  1. You can enter the property with an agent to preview it. (Although you are still buying the property “as is.”)
  2. You can use a buyer’s agent to help you negotiate a purchasing price with the bank.
  3. You can get a loan to purchase the property.
  4. Many banks do repairs to REOs before putting them up for sale.
  5. Since the bank now owns the property, the mortgage no longer exists. The bank will pay any tax liens and homeowners’ association fees due.

As with any investment, you want to do your homework and compare the listing price of the REO to others in the neighborhood. Yes, the bank wants to sell its REOs and recoup the money it lent out, but it may not be desperate enough to list for a low price or even entertain a low offer.