Real Estate Owned (REO) Properties: What To Know

When you’re in the market for a home, you may come across the term real estate owned (REO) property. This term refers to properties that are owned and being sold by the lender or mortgage investor because the previous owner failed to make their mortgage payments.

Buying an REO property may feel risky, but it’s actually an excellent opportunity for borrowers on a budget since these homes tend to come with lower price tags. Keep reading to learn more about REO properties and how to buy them, including the pros and cons of doing so.

What Are REO Properties?

A real estate owned (REO) property is owned by a property’s mortgage investor. REOs were foreclosed on, usually because the previous owner failed to make their mortgage payments. However, unlike other foreclosed properties, REOs failed to sell at auction.

The process of buying an REO is a bit different from buying a different home because they are usually sold as is. In other words, if there are any repairs needed, they’ll be the responsibility of the buyer. However, they also typically sell for below-market prices.

How To Find Bank-Owned Properties

If you’re on a tight budget when buying a home, you may seek out REOs to help you save money. These properties are less common than more traditional listings, but there are still ways to find them in your local market.

• Hire a real estate agent. Working with a real estate agent is one of the best ways to find local REO properties. Agents typically have an in-depth knowledge of the local market, meaning they are more likely to know about these properties before you do.
• Search bank websites. If a bank has REOs it’s trying to sell, it may list them on its website for prospective buyers and agents.
• Use the multiple listing service (MLS) database. An MLS – short for multiple listing services – is a database of local properties for sale. You can find REOs in the MLS, along with other properties for sale in the area.
• Check Fannie Mae and Freddie Mac. Both Fannie Mae and Freddie Mac have pages on their websites where they list REOs for sale in your area.
• Join a foreclosure database: There are various foreclosure databases that list REOs for sale in a given area. A quick internet search of foreclosures in your area can help you find such a database.

Pros And Cons Of REOs

Buying an REO has several key benefits but also some important downsides. Before buying this type of property, it’s essential to consider both the pros and cons.

Pros

• Discounted price: REOs generally sell for below-market prices, making them especially attractive for borrowers on a tight budget.
• No outstanding liens or taxes: Outstanding liens are removed during the foreclosure process, meaning you don’t have to worry about unpaid property taxes or any other outstanding liens on an REO.
• Motivated sellers: Banks that own REOs want to get these assets off their books quickly, making them more likely to accept a lower price or certain concessions.

Cons

• Potential repairs: REOs are sold as is and may be in a state of disrepair after the foreclosure. If repairs are needed, they’ll be your responsibility as the buyer.
• Possible tenants: Depending on the situation, REOs may have tenants – or even the original owner – still living in them.
• Special warranty deed: A general warranty deed may not be an option with an REO, and you may need a special warranty deed instead, which may offer less protection.

How To Buy A Bank-Owned Home

Are you considering buying an REO? Here’s a step-by-step guide to help you get started.

1. Get Preapproval For Mortgage Financing

Before making an offer on an REO, it’s important to get preapproved for a mortgage. Preapproval is the process in which your lender determines your eligibility for a mortgage.

Preapproval helps you learn how much you’ll be approved for and the interest rate you may be eligible for. It also shows sellers (including banks, in the case of REOs) that you’re a serious buyer, so it may help you get your offer accepted.

2. Hire A Real Estate Agent

While it’s possible to buy a home without a real estate agent, working with one will undoubtedly make the process easier. Your agent will help you find the perfect property, even REOs that may be more difficult to find. They’ll also guide you through the entire purchase and closing process.

A real estate agent is especially important when buying an REO or another nontraditional property. Because these homes are sold as is, there may be more risk for the buyer. An agent can help advocate for and guide you through this process to ensure the best outcome.

3. Find The REO Property That Meets Your Needs

Once you’ve been preapproved for a loan and have the right agent by your side, you can start shopping for a property. There are plenty of considerations when buying an REO. First, it’s important to identify your goals, such as whether you want to live in the home, rent it out, flip it or something else.

Because the home is sold as is, you may be more selective about properties than you would if you were purchasing a home through more traditional methods.

4. Make An Offer On The REO Property

When you identify the right property, it’s time to make a purchase offer. The good news is that because of the nature of REO transactions, you can likely offer less than you normally would for the house. Your agent can help you craft the best offer for your situation.

5. Get A Home Inspection

REOs are sold as is, meaning the bank/investor that owns it won’t make any repairs before the sale. However, a home inspection is just as important as it would be in any other sale. An inspection can help you discover whether there are any costly repairs needed. You may want to include an inspection contingency in your offer so you can back out if significant issuers are uncovered.

6. Close On The Property

Once you’ve completed the underwriting process, the final step of buying an REO is the closing. At this time, you’ll take ownership of the home and will finalize your loan documents.

The closing for an REO isn’t all that different from any other home closing, except you’ll be buying the home from an organization rather than an individual. You’ll still have to sign your loan documents and bring a check for your down payment, closing costs and any other costs to close.

The Bottom Line: A Bank-Owned Property Can Be A Good Investment

REOs can be a great opportunity for borrowers on a tight budget to buy a home at a lower price point than they otherwise would. However, REOs come with some risks, including the fact that they’re sold as is. If you’re considering buying an REO, start the approval process today so you can start the search for your new home.