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Why Buyers Should Consider REO Listings

It's no secret that it's a little challenging nowadays for those looking to buy property in the city to find what they're looking for. Not because Boston properties currently on the market aren't worth their pretty penny, but because inventories still haven't been replenished since the big buy rush that started last year. And as investors and would-be home owners continue to hunt for good bargains, there seems to be an agreement that grabbing a property now is still better than waiting for something to open up during the height of the market in the spring and summer months.

But what good is it to be looking now, when you know the market doesn't have much to offer? Well, you might say that, like anything else, it's a matter of patience. But more than that, it's also about knowing where to look.

For years, many buyers steered clear of foreclosures and short sales. In their minds, such properties were "damaged goods" -- real estate remainders that were likely to be dumps and money pits. Why risk such a big investment on a property sold in distress? Well, for one thing, we're now in a housing market unlike any we've seen in years. Inventory is extremely tight. But, there is a way to find good and relatively new properties available, since the poor economy of the past few years has produced more properties in foreclosure and offered as 'short sales'.

And so, as you enter the market either for the first time or as a seasoned buyer, you should be on the lookout for "distressed" sales. You might find a great property you'd otherwise have overlooked if you intentionally wrote off foreclosures and short sales. And when the market is tight, looking at these distressed properties make even more sense. It's not comprising your purchase, but it's being practical and smart - especially when you want to ride the real estate wave.

What are the risks?

It is true that foreclosures and short sales aren't just your typical buyer/seller situation because they involve more layers in the transaction process. In a bank foreclosure sale (also known as Real Estate Owned or more simple REO), the bank is the seller. Because the bank employees have never lived at the home, they know nothing about the property. To them, the home you're considering buying is simply an asset that needs to be liquidated.

In the case of a foreclosure, the bank sells the home "as-is" and requires the buyer to sign dozens of documents releasing the bank of any liability. The worst-case scenario: You buy a foreclosure only to discover a major problem, such as a property line dispute or previous leaks that caused mold or whatnot.

When purchasing a short sale, the seller needs to go to their lender to "approve" the sale. In essence, the owner is trying to sell for less than the loan amount, so they need the bank to approve the sale. Historically, banks are slow to give the thumps-up. This can lead to a situation in which a buyer waits for months for the bank to approve the short sale, only to have the bank reject it. Meanwhile, the buyer has missed out on countless other properties.

RELATED: click here to read our article on how you can have the fastest closing ever, and get an insight into how you can make the process more efficiently work for you. Follow these our tips and save a week's time of waiting.

Reasons to consider a foreclosure or short sale home

A sample of a brand new REO home in Natick, MA

While there are clearly risks in buying a foreclosure property, we have so much more information now on homes than previous generations. Today's Internet-connected, savvy buyer can learn a great deal about foreclosed and short sale properties before signing on the dotted line. The old saying "no risk, no reward" certainly applies to foreclosures and short sale properties as well, as these sales tend to be priced from 5 percent to as much as 15 percent below the current market value. That's essential to keep in mind, especially now that properties that have recently closed or are currently on the market are closing on an average rate of 12% above asking price.

Also, keep in mind that foreclosures aren't necessarily 'distressed'. The recently-concluded recession impacted people in all income brackets. Because of that, it's not unusual nor a rarity to find multi-million dollar homes in excellent condition and in good locations in foreclosure or offered in a short sale. In fact, just in the past year alone, Greater Boston has seen many upset sales in both developing and posh neighborhoods such as Brookline, South Boston, and Cambridge.

How can I minimize the risks?

When looking for a home in a market where inventory is tight, buying property on foreclosure or on short sale can be a great option. There are many ways to lessen the potential risks. Here are some that we ourselves look at when we recommend REO properties to our clients:

  • Search town records for past building permits to see if anything out of the ordinary was completed or planned for the property.
  • Have the home inspected top to bottom before getting too far along in the process.
  • Knock on neighbors' doors to see what information they have about the home, the neighborhood or the previous owners.
  • Look at the home's previous sales records. Many times the homeowner tried to sell once or twice before becoming distressed. If that's the case, review the home's sales history. If there was ever a contract on it, chances are there might be an inspection report somewhere.

Look for hidden values

There may be absolutely nothing wrong with a property in foreclosure or sold in a short sale. The bank has discounted the home because it sells such properties as-is, without disclosures. If you do your homework, you can use this situation to your advantage. And should you learn of a major problem with the house, negotiate with the bank for a lower price.

Don't forget: Banks aren't in the business of owning homes. They want these properties off their hands as soon as possible. Banks will take seriously any buyer who's well-qualified and ready to close a deal.

Contact us now at (617)505-1781 and find out what deals and steals you can take advantage of in the Greater Boston area.

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