What’s Better – Bank-Owned REO or Courthouse Auction? 

Big nationwide auctions have recently made headlines, but what is actually better for the average short sale investor…REO or bank/courthouse auctions?  Let’s take a few minutes to examine the pros and cons for each.

 Title – Purchasing a property via bank or courthouse auction frequently entails a commitment to all outstanding debts including unexpected liens and other judgments in addition to those for which the auction is taking place.  However, by purchasing a bank-owned REO property you will typically have assurance of clear title or at least a complete awareness of other fees or liens due.

 Occupants – Property sold at auction frequently has tenants or prior owners still in place, causing new owners to engage in immediate legal action in order to take possession.  Bank-owned properties have often evicted former occupants thereby eliminating the need for out of pocket legal expenses.  Just keep in mind, this is changing, and some short sale investors have encountered squatters as well.  On the other hand, depending upon you plans for the property, having paying tenants may be a strong positive.

 Finance Terms – Auctions require advance funding to be in place while bank owned properties may actually offer added terms or beneficial interest rates in order to move a non-performing property off their portfolio.  Since it can cost a lot of money for a bank to keep a property on their books, one way they entice others to purchase is by negotiating the terms of the finance offers.  This is especially true in areas where lenders may be limited by the number of homes they can release on the market (ie, federal regulations prohibit “dumping” in certain neighborhoods – often the same ones where many non-performing loans were originally written).  By offering highly favorable financial terms, banks are able to shift properties off their books without continuing to drive down prices.

 Bottom line – Short sales are perhaps the best bargain of all, but don’t underestimate the value in bank-owned properties, which can usually be closed quickly, whereas short sales generally take 3-5 months to close.   Auctions are a lot of fun but not always indicative of the best value especially for those just starting out or who only intend to purchase one or two properties.