Numerous distressed properties continue to exist on the real estate landscape. These distressed properties are comprised of REO (real estate owned) and “short sales.” This month, I’ll be discussing REO properties.

REO is a term used for properties that have been foreclosed upon and failed to sell at auction. These properties are sold by their lenders for fair market value minus the cost of necessary repairs. Right now, the REO market is rapidly expanding simply due to the sheer number of properties that qualify as REOs.

What’s happening in San Francisco with REOs? Well, there are 49 single-family homes and 36 condos listings throughout S.F. right now; over the last six months, there have been 54 single family homes and 82 condos sold. For both listings and sales, the single-family homes are predominantly in the southern part of San Francisco, whereas condos are sprinkled throughout the City.

For a home buyer, there are several advantages to buying REO properties. Price and close of escrow timing are certainly the biggest advantages of buying REOs. REO properties can usually be purchased faster and with less red tape than short sale properties, and they are usually priced to sell. However, REOs have their issues, and some of these include:

• As is sale: REOs tend to be in some sort of disrepair and are sold “as is.” As is does not preclude the buyer from getting property and pest inspections, however. Inspections are paramount when considering an REO purchase. A buyer can cancel an offer if something out of the ordinary is discovered during the inspection, such as a damaged foundation or anything else severe that was not previously known about the property.

• Neglected property: If homeowners don’t have money to pay their mortgage, they typically don’t keep up the monthly maintenance on a property. So it’s necessary to consider maintenance and repair costs.

• Sabotage: The previous homeowner could have sabotaged the property. How about pouring cement down sinks and tubs or leaving the water running throughout the household? Or how about removing all the appliances and pipes?

Before You Make an Offer
Before you consider the purchase of an REO property, make sure you have:

• Patience: Closings could take extra time if the lender is not organized. If the seller has multiple loans on the property, expect the closing to take a little longer. Lenders usually sway the terms and conditions in their favor, including the right to sell the property to another buyer even though someone is already under contract with them. Buyers need to know this is a potential problem upfront and must be emotionally ready for another buyer to come along and take the property just prior to the close of escrow.

• Stamina: The offer you make could be outbid by a higher offer, beat by a lower-priced cash offer, beat by an offer from a buyer who is using the same bank for their new financing, or beat by an offer with some terms the bank finds more acceptable. See “Patience” above.

• No interest in the home’s background: With REOs, there is usually little information about the property and no seller disclosures. The previous owners and occupants have been removed. The bank likely has no details about the condition of the property or any problems that need to be remedied. This is a risk with REOs.

• Flexibility for the unknown: Who knows who or what was living in the REO. Did the previous owners leave the property like a pigsty? I’ve seen mushrooms growing out of carpeting and multiple birds nests in garages in REO properties.

• Some extra money: Buyers are sometimes so focused on getting a great deal that they don’t think past the aspect of saving money on the acquisition of the property. This is a huge potential pitfall of buying these types of distressed properties and, unfortunately, buyers can see the “profit” they made at the time of purchase replaced by the cost of fixing the property. As previously noted, inspections are a must!

There are some great opportunities out there right now, especially for investors and first-time homebuyers. Prices are right, loan rates are fantastic, so now is the time to buy!

If you would like a certain subject matter discussed in a future column, please feel free to drop me an e-mail.

Jim O’Neil is a Realtor for Prudential California Realty at 2200 Union Street and has lived in Cow Hollow for the past 20 years. E-mail: [email protected]