Focus On REOs

REO. Three little letters, so much of our market. For those who've heard the term, but don't know what it means, it stands for Real Estate Owned. It's a banking industry term - homes for which financial institutions find themselves holding title, most often as a result of foreclosure. The catch is, they aren't in the house business. They're in the money business, and houses are just collateral on loans to them. So when they find themselves in a cycle like this, where they have a lot of collateral on the books, they get serious about turning it back into money. Great for buyers, as it drives down prices. Not so great for everyone else, especially folks who need to sell or refinance their home.

The national numbers are grim. You don't need me to go into them - just turn on CNBC for an hour, and you'll probably hear all you want about the national picture. Our local market has been hit by this as well, pretty hard, but not to the extent of many other markets. That said, REO activity is still the biggest driving force in our market, and will probably continue to be so through the rest of this year. As I noted in my 2008 review a couple of weeks ago, REOs accounted for 43% of residential listings that came on the market in the Lompoc Valley last year, and they accounted for 59% of the sales.

What does the average REO sale look like? Well first of all, don't blink, or you'll miss it. The median days on market for sold REO listings last year was 24, compared to 70 for non-REO listings. On average, they sold for closer to their list price - 1.7% below list, compared to 5.4% for non-REOs. Both of these speak to price. Most of the time, these properties weren't just priced to sell, they were priced to sell right now.

REO sales hit every price segment in our market, from the tiny 1 bedroom condo in Cypress Woods to the executive homes in Mesa Oaks. They did skew toward the lower end of that scale, however, and the median sale price for REOs was $217,500, compared to $319,000 for non-REO sales. I'm going to have a moment of candor with you here - I didn't realize that spread was that large until just now, when I pulled the numbers. That's just a staggering number. I have a few ideas about how that happened, but I'll need to chew on them for another post some time.

REO purchases can offer up some of the best opportunities out there - although we've also seen some outstanding deals on regular deals too. It depends on how motivated and flexible the seller can be. Here are a few things to be aware of if you are thinking about taking advantage of a great REO deal:

1) You know that C.A.R. contract that you wrote the offer on? It's pretty much out the window. Most banks come back with their own terms in an addendum, or in some cases, a whole different contract. The price and financing terms that you negotiated are often the only things that are the same. Read that contract carefully.

2) You're going to need some patience. Banks move at the speed of corporations, and they can be slow to respond to offers (although some are getting better about that), and once you're in a deal, they get slower to respond. And you're almost certain to have the escrow office down in the L.A. basin somewhere. This may not sound so bad for the uninitiated, but trust me on this - there's no benefit to a buyer to someone taking on escrows in bulk. Some of them have been just horrible. And we're losing quality local escrow and title reps here because of it. Don't even get me started...

3) You're buying a house or condo without the benefit of any disclosures about the condition. The bank never lived there, and they are exempt from making disclosures about the property condition. It's doubly important in these properties to get a good physical inspection, and if the bank doesn't provide a pest report, buy one yourself.

4) Count on it being "as is". Some banks will take on some repairs, some won't. Even in some cases where they tell you up front that they won't, we've seen a few go through with repairs to keep the deal together. But don't count on it.

All that said, don't let any of it deter you from going after one of these deals. The whole foreclosure problem is awful, absolutely horrid. I hate going into a foreclosed house and seeing the bedroom that was obviously painted for a young child. It's gut wrenching. But there is an upside - more people can now afford to buy a home without selling their soul than could for several years. And that's a huge positive to take out of this mess.