Are REOs Always Good Deals?

For the past year or year and a half we have all been deluged with articles, blogs, newletters and television reports about the vast amount of residential REOs that have hit the market.  These homes have really depressed the pricing on housing.  Sales numbers are up for homes this year because of the depressed prices that have occured and lured many buyers back into the market.

That has not happened in commercial real estate.  Pundits are predicting that the last half of 2009 and the first part of 2010 will see a plethora of commercial REOs hitting the market.  There are many reasons for this to occur such as an inablility of current owners to refinance debt when it comes due as well as swollen office and growing retail vacancy rate.

However, does this mean that buying an REO is always the best way to go?  The answer is really no because commercial real estate is much different than residential real estate.  One has to be rather astute in real estate to tackle a commercial REO.

The reason is that when buying residential properties, even REO’s there are many protections for the future consumer or homeowner.  There are warranties, and expectations that the seller is going to make all necessary disclosures and is not selling the buyer the proverbial pig in a poke.

When buying a commercial REO, the buyer is really buying a totally “as is” property.  The lender does not have the same duty to find out what they do not know and disclose to the buyer.  The buyer is assumed to be knowledgable enough to have everything check out and make his own decision based upon his own findings.

Certainly the lender selling the REO must disclose what they know to be a problem.  But they usually do not go out of their way to find out the problems to disclose as they must do for residential property.

Therefore the unsuspecting and  inexperienced investor may find himself with significant problems such as structural deficiencies, thorny tenant problems and possibly governmetal citations that must be corrected quickly or else heavy fines could be put into place.  When any or all of these items come into place the large “as is” disclaimer in the contract is trotted out by the bank and they will say they simply never knew these problems existed.

If there are a plethora of commercial REOs coming to the market it may be that prices will be just as depressed for properties that are not going into foreclosure. Those may be the very best deals to go after.  In fact even now, when there are not that many commercial REOs on the market, one may get a great deal by simply putting in a very aggressive offer and that may just be accepted.

Having warranties and representations and full disclosures from the seller are nothing to be ignored.  Think things through before you react.

Tags: as is property, buying an REO, commercial real estate, commercial REOs, depressed prices, depressed pricing on homes, refinance debt, reos