Friday, February 25, 2011

Foreclosures vs REO's. Whats the difference?

If you are interested in investing in real estate, it can be very profitable. There are a growing number of foreclosures and REO properties on the market at this time, with no end in sight to the increasing inventory. There are risks and advantages associated with each method. Foreclosure is a legal process where a lender attempts to take legal possession of a property on which the homeowner has failed to make payments. If that property isn't sold in an ensuing auction, the title to the home is transferred to the lender. Then the home is known as a real estate owned, or REO, property. Knowing how each process works is crucial for an investor.

Let’s take a detailed look at each investment method.

Foreclosure is the procedure used by lenders who try to take legal possession of a property after the owner defaults on the mortgage payment. A lender usually begins the foreclosure process when the homeowner fails to make mortgage payments for three consecutive months. Each state has specific procedures and timelines that must be followed by a lender. Certain documents must be filed on a timely basis. At the end of a foreclosure, a judge will allow the sale of the property to proceed. The final step is when the property is auctioned off at a trustee sale. The lender will usually set the minimum price that it will accept from bidding investors on the courthouse steps. If investors' bids match or exceed the minimum set by the lender, the property is sold and the title to the property goes to the winning bidder.

If the property isn't sold at auction, however, it becomes an REO, or real estate owned. The property title is transferred to the bank. A foreclosure home that has become a bank-owned property can then be listed with a licensed real estate agent hired by the bank. Most lenders have a department that handles REO properties. To sell the home as quickly as possible, the lender will remove any liens on title and resolve any other issues that might interfere with the sale of the property.

There are several key differences between the two investment methods. A lender that succeeds in foreclosing on a property takes possession of the home but does not own the property at that time. REO properties, on the other hand, are owned by the lender that foreclosed on the property. Foreclosures are sold by a trustee to the highest bidder at an auction, not by real estate agents. By contrast, the lender in an REO case must authorize a real estate agent to sell the property. The responsibilities of the buyer also differ in each case. In a foreclosure, the home is sold as is and without a title warranty. The buyer may be liable for paying off any liens or encumbrances attached to the title, since the lender assumes no liability for any liens. For an REO, the lender must clear all liens and encumbrances from the title. Finally, a foreclosure cannot be financed with a mortgage but must be paid for in full, with a cashier's check, at the time of the auction. The buyer of an REO property, however, can pay cash or finance the deal with a mortgage.

Buying a property at a trustee auction or purchasing an REO can be a very lucrative way to buy real estate. However, there are associated risks with each method. You must obtain clear title to the property. A foreclosed property might have liens that must be paid by the buyer, or the property might require costly repairs after the purchase. An REO property will have a clear title, but it, too, might need extensive repairs. Be sure to do your homework on the home you are looking to buy. Research title if you can, and try to get into the home to see if it needs major repairs, or if there are squatter living in it.

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1 comment:

Christopher said...

Very Cool ! know I know the difference.