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Recently there has been a great deal of talk about Real Estate Owned Properties or REO’s. During these conversations investors have asked me if I think the high number of REO’s will weaken the short sale market. The answer to that question is a simple “no” and the reason for that answer is even simpler.

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An REO is a home that went into foreclosure and was put up for sale at a foreclosure auction but was not sold. Oftentimes, not only was it not sold, it may not even have been bid upon. After this unsuccessful auction the property goes back to the bank or mortgage company.

Of course, this whole process can be avoided by a short sale. However, many banks are under the impression that they can make more money out of an REO. More often than not wholesale pipes, they are mistaken. There is a reason why these houses did not sell at the auction, and an educated consumer knows better than to pay a high price for them. Making money in real estate is like making money in any venture. You make your money when you buy, so be sure to buy right.

In most cases these houses have been sitting vacant. An empty house is a neglected house, and the damage can be extensive. Heat and cold take their toll.

When the furnace is not on or the air conditioner not operated, the home is adversely affected. When a property is vacant there are no humans to scare off pests or keep the pipes running. No one has been raking, shoveling or mowing. Why these possibilities alone are enough to bring down the price of a home, they are just the beginning.

A buyer would be foolish to pay high bank prices for these properties. Owner/occupants do not want to pay when major renovation is needed. They may not mind painting, but they want minimal repairs. It is sometimes impossible for a bank to sell these homes for a desirable price. When the banks can’t sell them, and they usually can’t, they are forced to go to investors.

The banks are going to see that while holding these homes they are losing money. They will eventually have to change the way they do business. When this happens, they will begin to become more and more interested in short sales.

And as short sales continue to be an option, and there are more and more opportunities for banks to do short sales, the banks may even change their desired “cash” purchase strategy and finance the properties! Wouldn’t that be spectacular!

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