Buying REO’s – Should you ask for Repairs?
Saturday, April 18, 2009 | 2 comments
First of all if you are reading this, thank you. Also, if you ARE reading this you probably know what an REO is. REO stands for Real Estate Owned – property owned by a bank after foreclosure. I am not here to tell you about which REO’s to buy but rather how to buy the REO you want. This is the first blog on this topic.
REO’s are good values as long as you do your homework. A lot of these properties are in disrepair and need some kind of work to make them a nice home. The banks like to sell these properties AS-IS. In other words they do not want to do any repairs. That doesn’t mean they won’t do any repairs, it just means they don’t want to. So don’t be afraid to ask for repairs. Legally, once something is discovered on a property, like a leaky roof or faulty windows or even foundation issues or termite damage, it has to be disclosed. Whatever the condition is it has to be disclosed to you the current buyer or the next buyer. So once the problem is discovered the seller has to deal with it one way or another. They can agree to do the repairs, agree to split the repair costs, agree to credit for the repairs (this is the most common way for the bank) or they can do nothing at all and leave it up to the buyer to take the property as is. Depending on the amount of the repair cost and the type of loan most buyers won’t take the property as is. This leaves the seller in a precarious position because if they lose this buyer the condition is still there and has to be disclosed to the next potential buyer and any that come after that. And in this market with home values still dropping the seller is probably better off agreeing to repairs as long as they have a strong and committed buyer. So don’t be afraid to ask for repairs even if the property is marketed AS-IS. This is even more pertinent if you are using FHA financing. But that is for another blog.
Thanks for reading!
I wish I knew what to do with an REO I am looking at now. It is a small duplex and seems to be very fairly priced at $180,000 (valuations nearby are $220K and up). We have only been able to negotiate it down to $173,500 and then we found quite a bit of dry rot along the peak of the roof, mostly just on one side. So, it looks like it needs a new roof, which makes it somewhat less of a good deal. It hasn’t been on the market too long and I think I can make it work as a rental (i.e. positive cash flow), but my suggestions that the roof get fixed first (or else compensated or split or anything) are all rebuffed with the standard “as is” argument.
Steve, what has changed with regards to “As-IS” sales right now is the lack of inventory. We are currently in a Sellers Market since there are more buyers than sellers. So the sellers feel they have the upper hand and will tell you that they will sell it to the next individual that comes along. So you are kind of in a bind. One thing the banks really want though is someone that will close the deal. If you can convince the seller that you are not going to keep asking for more concessions you might be able to get them to help you with the roof. Have your realtor discuss this with the listing agent and see where it goes.
You have another option with the type of financing that you choose to use. The bigger banks are rolling out “Renovation” loans that will allow you to roll the cost of the repairs into the loan. The same rates apply and the loan is good for up to 110% of the improved value.
I hope this helps. Good luck!