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REOs, or bank-owned properties that have been foreclosed on, are the hottest market segment in Orange County. However, if you want to buy one, be forewarned.

As previously reported in this blog, competition is intense for these properties for several reasons: 1) There aren’t many of them on the market (only about 6% of total listings); 2) They are typically priced below market value; 3) Banks make decisions quickly, in comparison to short sales (that could take months), and; 4) Most of them are under $1 million. For all these reasons, buyers and investors flock to these offerings.

The Csira Group recently represented a buyer who was in the market for a home in the $500,000 price range. After a long search, an REO property popped up for $497,000 that met all the buyer’s criteria. Sight unseen, we generated an offer $1,000 above asking price, all cash, and sent it in within 30 minutes of the listing coming onto the market. We confirmed that our offer was the first one submitted.

As the property was vacant (as are almost all REOs), we met that day at the property to do an initial walk through. What we found was what was once a nice home in a well maintained neighborhood, but a property that had been allowed to fall into a state of disrepair over several years. There were obvious items that would require immediate repair, such as:

* A water leak in the foundation;
* All flooring in the downstairs had been removed (as a result of the leak), leaving just the concrete;
* The hot water heater had failed and leaked out onto the wooden base next to the furnace;
* Mold had formed on and around the base of the hot water heater;
* It was assumed that the mold had been spread through the home from the furnace and that mold re-mediation would be required;
* All upstairs carpeting was severely soiled and stained (required replacing);
* All interior surfaces needed to be painted;
* The entire exterior of the property required painting (disclosed to us that the HOA required this);
* Several windows had dry rot;
* Some windows were broken;
* Many other minor items

One week later, the listing agent contacted us to let us know that a total of 27 offers were received. All the offers had been submitted to the bank. The bank’s response to all bidders was:

1. Submit your best and final offer within 24 hours;
2. Buyers were required to immediately waive all contingencies (i.e. no time to conduct inspections or due diligence);
3. Earnest Money Deposits would be non-refundable;
4. There would be no buyer incentives;
5. Property was being sold strictly as-is.

Obviously, we were not allowed ample time to get a professional inspection or to gather quotes on the list of items that required repair. This type of transaction is not for the faint of heart. However, our client was bold enough to agree to all the bank’s requirements and increased our offer by $12,000, to $510,000. We still felt that the property was a good deal in spite of all the work required. We also believed we had a good chance of winning, since it was unlikely that anyone would be able to secure financing due to all the issues with the property.

In any case, if you are considering getting into the market and have an REO listing in mind, be prepared for a heated battle and to be placed into a position of compromise.

UPDATE – May 11, 2009
On Friday, May 8, 2009, almost two weeks from the time our original offer was submitted, we received a call from the listing agent informing us that our bid was $60,000 below the high bidder and that we would have to increase our bid above that to remain in consideration (for a total of $570,000 on a property that was listed for $497,000). Our client chose to remove herself from the process and we allowed the property to go to a higher bidder.

CONCLUSION – June, 2009
The property closed escrow on June 2, 2009 for $575,000, – $78,000 OVER asking price. The buyer was an investor and paid in cash.