In our current market, in St Tammany Parish, LA, there has been an increase in both of these types of investment opportunities. Foreclosures and REOs. This post will explain the differences and compare the pros and cons of purchasing potentially the same property.
I believe St Tammany Parish is weathering this mortgage / economic crisis better than other parts of the country. I believe we are in the better half on this thing, and this is a good thing. I know the number of foreclosures has risen significantly in St Tammany Parish over the past 2 years, because I have been keeping an eye on them at every sale. In accordance the number of REOs has risen on the market as well, almost tripling in number in less than a year.
One of the main reasons for this is the market is upside down. Many people currently owe more on their homes than what the home is currently worth. Mortgage companies who are FDIC Insured are required by law to bid at the foreclosure sales, and from what I am seeing, in many cases (80% plus, right now in this market, 2008 – 2009) they are forced to overbid the current market value on these properties.
For example; the writ amount is 175K, but the home is currently worth only 155K. The bank, due to FDIC Insurance, is required to bid 165K, even though the home is only worth 155K. Hence, you as the purchaser are not going to pay $165,001.00 for a home which is currently worth 155K.
Simply put the market is upside down and therefor there is a greater number of foreclosures, but the dark side is many of these foreclosures do not have any equity in them, due to over financing.
When a property is purchased as a foreclosure there is no ability for the buyer to negotiate purchase price. It is an open public auction with the bank making sure they get as much of their money back as they can. As well the properties are sold "AS IS", and the purchaser is not allowed an opportunity to inspect the property for hidden or latent defects. This puts the purchase at greater risk. Lastly, at a foreclosure sale, title insurance is not provided when you make your purchase.
When a property is purchased as an REO, the purchase is a standard real estate transaction. Allowing for inspections, renegotiation, and title insurance. The purchaser of an REO is allowed to negotiate sales price both, in the initial offer / counter-offer stage, and again before the expiration of the inspection period. This also allows for the purchaser to walk away from the purchase if he finds too much damage in the home, during the inspection period, and does not wish to renegotiate.
Title insurance is provided in many cases by the sellers of these REO homes. However, even if not, you as the purchaser are able have title insurance added to the property at closing. The bank will require a lender's policy, and in some cases pay your policy as well, or if not then you will be offered the opportunity to purchase title insurance and I will always recommend it. Title insurance is protection for the purchaser.
Basically when you purchase a foreclosure you are putting yourself at greater risk, if only for the inability to inspect the property. In my opinion, a standard real estate transaction is a much safer, more secure way for someone to purchase a home.
If you have any questions, please post or email.