Last week a client called me to ask about a house that was in foreclosure in her neighbourhood. She was interested in buying it and needed more information on the foreclosure process.

I thought that I would share a bit about foreclosures and how they work.

There are two kinds of Foreclosures.
1. REO, which is short for “Real Estate Owned” by the bank. The bank has “repossessed” the house from the previous owner due to non payment of their loan. The bank is then the “seller” and the property will be sold just like any home offered on the open market. The buyer can make a traditional offer with contingencies and inspections.

2. FORECLOSURE In this case, the bank is auctioning off the house to the highest bidder. They are looking to satisfy the money owed on the home. In some cases there is more owed than the home is worth. In other cases it is less. Here’s the catch: You can’t inspect the house prior to purchasing it, receive for credits for repairs and in some cases you may have spend money to evict the occupant from the home after you own it. Oh, and you have to pay in FULL, in CASH (well actually by way of a Cashier’s Check).

What do these two types of home sales have in common? There is a strong likelihood that homes purchased somewhere in the foreclosure process have lots of deferred maintenance. Chances are, if the homeowner is not making their mortgage payment, then they are not keeping up with necessary repairs and the like.

Something else to keep in mind: REO: when the house hits the open market, it may still have multiple offers on it and you may find yourself in a situation where in order for your offer to be competitive, you might have to reduce or remove contingencies in order to open escrow.

Foreclosure: You are competing with very seasoned buyers (flippers) who buy foreclosures for a living. They attend these auctions weekly, have teams in place scoping out the properties, and access to millions of dollars in cash. Additionally, since this is not their first rodeo, they know how to get remodeling work done and are usually in the construction business.

I hope that this quick bit of information on Foreclosures and REOs helps you understand the process a bit more. If you have any questions, please feel free to reach out to me on my cell at 310-963-7384 or via email at [email protected].

I look forward to hearing from you,
Revi