Is an “REO” closing right for you?
In the wake of the American housing crisis earlier this decade, we have seen a rise in “REO” transactions. REO is short for “real estate owner”, as in real estate owned by a bank who foreclosed on the property. As foreclosure sales took place, banks took title to many of the properties they loaned money on. Once the bank gets the property back, it needs to get rid of it. As a result, in addition to good old fashioned traditional sale transactions from regular third party sellers, the Chicagoland real estate market also has its share of properties being sold by banks. These transactions can net a buyer with a good deal on real estate here in Illinois, but an REO transaction is not for everyone.
I advise all of my clients interested in an REO transaction that the key virtues needed by a real estate buyer are flexibility and patience. REO transactions, in theory, trade a somewhat less than market value purchase price for some serious limitations in terms of the buyer’s contractual rights and what a buyer can expect to receive. This is doubly true when there is a tenant in the REO property. So, if a buyer is the kind of person who likes certainty and needs definite answers so that they can plan or if they like to have things “lined up in advance”, an REO transaction may not be right for them.
Who is an REO transaction for then? Well, someone who is getting a good deal and is willing (maybe even more than willing) to deal with the bumps in the road and bruises that come with an REO purchase in Illinois. Contractually, the buyer in such a deal will have very little, if any, recourse against the bank selling the property for anything that goes wrong with respect to the condition of the property. The allure of the REO transaction is the lower than market purchase price. Opposite that are the less than favorable contractual terms. It is a matter of risk and reward. For instance, many buyers are unable to get into the REO property if it is occupied by a tenant to see if a unit is trashed/destroyed/had all the pipes removed. Such a deal is only good for a buyer who might say “hey, we were going to renovate and we got a great price”. A buyer who is willing to wait anywhere from six months to a year to get the occupants out (the laws for evicting tenants or occupants who are inherited from an REO property give thos tenants/occupants lots of rights) may be a prime candidate for an REO purchase. If a buyer loves the location and this is the piece of real estate that the buyer want to have and the buyer is willing to wait and/or jump through hoops and maybe even suffer a bit of pain along the way to get, then an REO deal might be right for them.
I really don’t want to come off as a downer. There are lots of good reasons to do an REO transaction. Some people have been lucky enough to have good experiences (ie. occupants can be coaxed out with a few bucks, they don’t do damage, the seller is able to close on time, etc.). Sometimes, the price is just too good to pass up for the opportunity to own the property.
Nonetheless, a prospective REO purchaser needs to look at the transaction with open eyes. The buyer will have to purchase the property “as is” and sometimes even “sight unseen”. The post-foreclosure protections available to tenants and occupants are powerful and because of the “fog of war” surrounding an REO/foreclosure, it is sometimes hard to find out the truth about who the tenants are or whether or not they have a real lease. To make a determination, a potential buyer needs to evaluate just how good of a deal THEY are getting. Oftentimes, the contract the seller provides will make the buyer responsible for a number of charges and fees typically paid for by sellers (transfer taxes, municipal inspections, owner’s title insurance policies, etc.) and the prorations given at closing for real estate taxes are usually less than those a “regular” seller would give. In addition, attorney’s fees for such a transaction are usually higher than a standard deal. A potential buyer needs to evaluate whether their “great” REO deal is actually a great deal or just an okay deal (or maybe even a bad deal).
I know that’s a lot to chew on for starters, but there’s no reason not to be frank about these kinds of transactions. They aren’t for everyone. If such a transaction is for you, it might be a great thing. You just need to be sure you know what the ride is going to be like. Our office helps buyers in Chicago and the suburbs of northern Illinois with REO purchase closing transactions. Please feel free to contact us to see if we are a match for an engagement.