An Insider’s Perspective on REOs, By George Medrano, Broker

Although Tali Wee of Zillow brought up many important aspects of the REO Industry in her recent story here on RE-Insider.com, all the points that were made are not necessarily adhered to by every bank. I do know that many buyers have questions about the purchase of an REO home, that is a given. From my 16 year experience in selling bank owned properties, in closing approximately 2,000 REOs and having rehabbed over 800 distressed homes, I want to give you my perspective about these REO myths.

Just so you know, I managed the REO portfolio for Home Savings back in the late 90’s and my region was Southern California. My salaried position with the bank was that of Asset Manager, seller, listing broker, rehab manager and co-manager of the office. When Home Savings became Washington Mutual I was fortunate to have been chosen to represent Wamu as an outside broker handling the same Southern California Region. WAMU sold their REOs in a manner totally different than Home Savings, as they outsourced most of their portfolio to third party companies and to brokers like myself. I’ll just cover a few of the myths that come up when dealing with REOs.

My immediate responsibility with Home Savings, Washington Mutual and the other asset disposition companies was to make the property safe to anyone walking into the home. Health and safety was the number one item on our to-do list. This was true for over eight different asset management companies and banks that I worked with. Along with the Health & Safety aspect, all utilities were turned on so that the contractors and I could determine what was needed to rehab the home as well as to immediately make the home safe. Things like immediately securing the home; broken glass; missing appliances; exposed electrical wires; possible mold infestations; rekeying the home; water, gas and pool leaks were many of the items that were looked at as soon as the bank took possession of the property. Again, health and safety was number one on all of our lists with all of my clients.

There are a number of asset disposition companies and banks that do not rehab. Many of my clients chose to rehab the homes and then sell them at market value. Please know that when we rehabbed the home the finished product was outstanding and the reason for that was that we worked with great contractors. We started from the curb with landscaping, exterior paint and a new roof when needed, new interior paint, new flooring, new appliances, new light fixtures, new kitchen fixtures, the kitchen was left looking brand new, in many cases we painted the inside of the garage, a new garage door was installed if needed, we even installed all new door knobs, new, new, new. My clients also gave a one year home protection policy in the event something would go wrong after the property sold. I have never dealt with HUD but I believe that they also make repairs to the home, but not necessarily to the extent that my banks did.

Regardless of the bank rehabbing the house or not, I don’t know of a single realtor who would sell a house without doing a physical inspection. The only exception I can think of would be that of a contractor/buyer who wants the home “as is”. The banks are exempt from giving a property disclosure but the realtor is not. With foreclosed homes, no one really knows what has happened to the property since it went into default. Also, the buyer can ask for repairs once the property inspection has been done. Whether any repairs are made by the seller is another story. Please remember that with REOs all parties are interested in closing the sale and some new negotiations can be had, all within reason.

Having been an Asset Manager and an REO Broker for over 16 years I have made needed repairs to homes in order to keep the house in escrow. Much depends on the relationship and the credibility the listing agent has with the bank. I have worked for banks that did not make any repairs but those were far and few. Typically the homes where no repairs were done were the homes that could only sell for cash because no lender would make the loan.

Yes, many properties do remain vacant for months and even years because of legal issues, title matters, the bank not foreclosing and letting the property sit vacant, etc., etc. However, the owner of the property (the bank) is still responsible for all the repairs to the home once the home has been foreclosed on. Things like rodents, frozen pipes, the homeless that use the house for shelter, theft, landscape maintenance, all utilities and many other maintenance issues all belong to the bank until the bank passes title to a new buyer. In areas of extreme cold weather, the asset managers and realtors will have the home winterized in order to prevent the pipes from freezing. It is important to know that it is in the best interest of the bank, the realtor and the asset company to protect the home at all times. Please also remember that the majority of the lenders will not lend on a home that has appliances missing, a leaking roof, plumbing that does not work, a pool that is green, etc., etc. The bank’s appraisal will bring up all items that will need to be done prior to the closing of the escrow. At that point, the seller (the bank) will have to decide to make the needed repairs or not.

There are ways to buy what I call a true “as is” purchase and that would involve an all cash transaction or a loan that is called the FHA 203B that allows the buyer to fix the home after the escrow closes. On this type of loan the repair amount is given to the buyer and the work has to be done within a certain amount of weeks. I have never done this loan but it is surely out there.

There should not be surprises when buying an REO because the bank will give a clean and clear title policy free of liens except for the usual tax, loan, mineral rights, CC & Rs and other matters found in most title policies. The new lender will not lend on a property without having a clean and clear title policy (there are some exceptions here as well). It will require that the buyer obtain a lender’s policy that covers other title matters after the close of escrow. Buyers should check with a title company of their choice to decide the best type of policy for their situation.

Buying an REO is a bit different than buying a regular home. Each bank has their own set of guidelines that must be followed by the realtors as well as the buyer. I truly believe that buying an REO is much easier than buying a standard home. Don’t forget that the bank has lost a lot of money by having to foreclose. The bank also wants to get rid of the dead asset as soon as physically possible. The asset manager is not emotionally involved, it’s all about trying to move a dead asset into the positive column and recoup part of the money they have lost since the owner stopped paying. The banks take huge losses every time a home is foreclosed. Having been an Asset Manager and an REO Broker, I can clearly tell you that the banks would rather not be in the real estate business.

My experience with REOs is that they will sell at a price that the public is willing to pay just like any other home. I personally have not seen REOs that were priced below market. I did however have a number of REOs that were overpriced by the bank and they did not sell until the price was adjusted according to the marketplace. My philosophy is that the homes sell at market value in their “as is” “where is” condition. Whatever that condition is, rehabbed or not rehabbed, on the railroad tracks or on the water, you can be sure that it’s all about the pricing. The same logic goes for standard home sales.

Please remember that I have given you my experience with REOs and I am sure that the next 50 REO brokers you speak with will have similar but different experiences of their own. I hope that I have given you something to think about and most importantly I hope that I have allayed any and all fears about buying foreclosed properties.

Thank you,

George Medrano
Associate Broker
BRE #00475041
Evergreen Realty
REO Director