REO is the acronym for Real Estate Owned. Owned by banks, insurance companies, mortgage companies, and anyone else who ends up holding the deed when foreclosures are finished and there were no bidders (holders of ten or more of these properties are listed in the box on the left). These are the reluctant owners who thought they were buying guaranteed cash flow, but instead ended up with real property that most likely is worth less than the original loan amount. How we as a community of buyers, sellers, and brokers end up valuing and moving these homes into the hands of resident buyers and rent-minded investors is likely to be one of the most interesting stories in real estate this year.
First, the number of REO properties is small in absolute terms, but as of the end of the year, nearly 400 homes in Sonoma County fell into that category. Less than half of that number were actively on the market, so there is a growing reserve of over hundreds of REO homes that aren’t listed on the MLS yet. The sellers are motivated to get these properties off the books, but they don’t want to flood the market and depress prices any further. Still, the need to dispose of the homes will be a strong incentive for the REO holders to accept qualified offers and to avoid piling up even more inventory as the foreclosure boom continues.
Some properties are on the market now that I would classify as excellent values. Some are inexpensive enough to create a positive cash flow for investors; others are estate type properties at prices that will look like great deals in a few years. I can produce a list of the MLS-listed, REO single family homes available for download if you would like to see what’s on the market. I would also be happy to produce a list about REO properties in specific areas.
In the last six months 60 REO single family homeshave been sold. Selling prices ranged from $195,000 to over $1,000,000. Depending on location, the prices they are selling for are anywhere from 15% to 30% below the market peak prices of 2005. Almost nowhere in the county is immune from foreclosures, so these sales happened in south west Santa Rosa and the Russian River, but also in Healdsburg, Sonoma, Sebastopol, and Fountaingrove.
The other factor to consider along with REO’s in Sonoma County is short sales. These are sales for less than is owed on the property and the banks and other mortgage holders end up negotiating how much money they are willing to lose. Their alternative, of course, is to foreclose on the property and take their chances that either wiping out a second mortgage or a HELOC (Home Equity Line of Credit) might leave them in a position to recover their investment. There are more than 500 short sale listings right now, and it’s fair to say that all of them are highly motivated sellers. Add to this the even more motivated sellers of the 41 homes listed on the MLS that are in foreclosure or have a notice of default filed, and it makes this is an interesting time to be a buyer.