Does REO Properties = No Liens on the Property?

Question

Hello BP Peeps,

Can someone please clarify, if  REO Properties mean the bank has removed all Liens and/or money due on the property?

Or does it simply mean the property did not sell at auction and the bank still owns the property liens and all?

What's the advantage?

what's the disadvantage?

Thank you BP Peeps,

Looking forward to hearing back,

S

Phil Z. · Answer

Just to clarify.  A Foreclosure is not always 'yet' free and clear, but it should be.

There are many (MANY) cased were liens were missed in the foreclosure process and have to go back through foreclosure.

As long as you do a title search, you shouldn't close until the seller provides clear title.

Rick H. · Answer

Some erroneous information posted here.

An REO means that a lender has foreclosed on their mortgage, whatever lien position. At foreclosure auction, no other bidders met the full credit bid the lender required and the property "reverted" to the lender.

Said lender now owns the property on its books, which was formerly a mortgage asset, it used to be termed OREO ("other real estate owned") by bank auditors because these were not assets intended as buildings used by banks for retail offices, etc.

A lender that (now) owns a property inherits all the senior liens, if any, as well as property taxes (both current and delinquent) as well as the ongoing issues with possession and maintenance.

If and when the property is sold, they are typically retailed by listing with agents who have some level of experience.

Most REO properties which are sold retail, are sold with title insurance, however there are properties from the heady real estate markets frenzy of 2006-2007 with major defects that are still working their way thru the system. So, any loan that was originated during this time period are already flagged and on my "look closer" list.

William Murrell · Answer

Once it's REO, it's clear.   They have gone through the process of buying it and paying off the liens like taxes, etc.  You can always run a title search to verify, but yes.  The advantage is that the bank has purchase it and cleared everything out.  The bad is that now you'll have a harder time talking the owner (the bank) into a really good deal.  They have clear cut policies on how they'll handle selling it from here out.  And with things being what they are these days, they know that fifty other investors are right behind you just itching to make them an offer.  But that shouldn't discourage you.  You can still usually get a good deal, maybe just not an unbelievable one.

Christopher Phillips · Answer

@Susan Carman

Notice of default.

Foreclosure process...

If a Trust deed, the clerk sets an auction date. If they fail to auction it off, then the bank buys it back. They clear the liens, remove the occupants, and put it up for sale as an REO on the MLS with a listing agent.

If a mortgage, the foreclosure process has to go to court to receive a foreclosure judgement. Once the judgement has been received, the bank will put it up for auction to get their money back. If the auction fails, then the bank buys it back and goes through the process of clearing the liens, removing the occupants, and putting it up for sale on as an REO on the MLS with a listing agent.

Chad U. · Answer

Those are DoR state tax liens and separate from property tax liens.  Typically state tax liens get wiped with the foreclosure but property taxes do not.  So you'd be responsible for paying the property taxes owing, but likely not the state taxes.  I say likely as the state needs to be properly served as part of the foreclosure to be wiped.  Also I'm not familiar with Connecticut foreclosure laws concerning state tax liens, so best to check with a creditors rights attorney in the state.  And no, the property taxes are not "baked" into the reserve price as they cannot recover those, unless they were already advanced by the lender.

Chris Seveney · Answer

@Susan Carman

REO means real estate owned

This does not mean title is clear. If you buy it via quit claim deed you could buy it with title issues or other issues such as unpaid water bills etc.

This is why you buy it and get title insurance and go through a traditional closing - then the answer is yes. But we have seen and sold reo properties via qcd that were not clear title and had liens and encumbrances on them

Mat O'Grady · Answer

@Ralph Bednarczyk

Yes, I believe you would need to pay the taxes. The taxes take first position, so the mortgage is after taxes.

Ralph Bednarczyk · Answer

Following up on this to my situation in Connecticut.  I am headed to a foreclosure auction (due to no mortgage payment).  I did title search, and indeed something came up.

The Bidding statement from the committee lawyer that will be running the auction says according to Tax Collector there is $2100 recent property tax owed.  So they have this property tax owed information, but not older tax liens, so I'm confused or uncertain.

In title Report it's phrased this way:

15. Tax Lien in favor of State of Connecticut Department of Revenue Services against (defendants) in the amount of $23,841.11 plus interest and costs dated August 2, 2023 and recorded August 10, 2023 16. Tax Lien in favor of State of Connecticut Department of Revenue Services against ( defendants)  in the amount of $709.16 plus interest and costs dated October 25, 2023 and recorded November 2, 2023

They have 2 other judgment liens against them as part of the court filing, which is like 10k, which looks like they will be creditors and get that $ as part of the sale proceeds.

I am pretty sure that whoever wins the auction at say 500k, will have to pay the Property tax liens owed on top of the 500, that it's not already baked into the reserve price.  Lawyer that arranged the title search for me believes so too but isnt 100%.

Thanks for all thoughts!

Evan R. · Answer

@Brandon Gamblin      There could be a second mortgage, (home equity line of credit) or a mechanics lien (not paying a contractor) or a tax lien (municipality).

Brandon Gamblin · Answer

Ok. So I have some questions. It confuses me that the bank would have to pay anything considering the fact that it is owed the remaining balance on the loan from the default of the borrower. What other liens could the bank possibly have to owe first before it retains proper possession of the collateral? Because its sounding like the bank has to pay for it to get repossession of the collateral. Or am I misunderstanding something?

Does REO Properties = No Liens on the Property?

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