What are REO's and why are they affecting your property's value?

The Elk Grove, California market has seen a period of great appreciation, and now depreciation. What is driving down the prices? One main reason is that there are many foreclosures and banks are taking them back, just to sell them below market. These are called REO's.

So what are REO's? REO stands for Real Estate Owned. It's a term used by banks and the real estate industry to signify that a property is owned by the bank. REO's are post foreclosure properties, meaning that the property was foreclosed upon and went to a true foreclosure at the courthouse, at which point the bank that financed the loan bought it back. The bank buys it back because there is no one willing to bid on the property.

There are pre-foreclosures, foreclosures, and post foreclosures. The pre-foreclosure is a property that is on it's way to being foreclosed on and the seller may put it on the market to sell it for less than what the total loan amount is. This is called a "short sale." The Realtor representing the seller can negotiate with the bank to lower the amount that bank will accept for the property. There is an automatic loss on the bank's part. The question is how much? Some banks are willing to negotiate more than others, so it depends on the bank. If the property does not sell, then it goes to a true foreclosure at the steps of the courthouse, where only cash is accepted. You must have the total bid amount at the time you win the auction in form of a cashier's check.

If the property doesn't sell at the auction, the bank buys it back and puts it on the market with its own Realtor, usually pricing it below market. They are usually not in top condition, which is why the price is lower than market. REO's are becoming better and better buys because they are flooding the market and banks are becoming more and more negotiable. They don't want to hold on to the property. They are "must sell" properties and the banks only want the cash. As time passes, banks will be even more negotiable and buyers will be able to get great deals.

This is all bad news for sellers, but great news for buyers. The market appreciated way faster than it should have and now it's correcting itself. There is no telling where the bottom is, but this trend should go on for a while. If you have to buy a home, there are great deals out there. If you don't have to buy, then wait until you feel comfortable about the prices. One other factor in pruchasing is the mortgage rates. They are creeping up slowly, so hopefully they will remain about the same for a while.