Understanding Real Estate Owned (REO) Properties
Real estate owned (REO) means that the bank owns this piece of real estate. That happens when a homeowner is foreclosed on and the bank acquires the property into its portfolio.
In case you have not noticed, banks are not in the business of owning real estate. That’s why you cannot rent to own a foreclosed home.
Typically, foreclosed homes get sold at foreclosure auctions, but sometimes they do not. When they are not sold, it is usually because the auction start price is higher than what the property is actually worth. The auction start price is usually set to whatever the outstanding balance on the home is because otherwise, the bank would be losing money.
While the bank wants to get the property off their books, their initial intent is to sell the money for as much money as possible to recoup costs.
When the property does not sell at auction, the property becomes real estate owned and the bank tries to sell it as quickly at a more attractive, lower price.
How to Purchase a Real Estate Owned Property
The bank or the bank’s realtor will publish a price that they’re looking to sell the property for, but like all real estate, you can make a fair offer at a reasonable price. The bank will likely sell the home to whoever makes the best offer.
Offers go through the bank’s realtor or the bank owner.
You can find REO homes for sale on the bank’s website if the bank is selling without a realtor, through a realtor or on websites like this one. If a bank has an REO home for sale, the loan officer will usually inform customers who are looking to get pre-approved for a loan to purchase a home.
One of the issues with REO homes is that they are typically sold as is. Of course, if the bank is desperate to sell the home and no one is taking the bait, the bank might try to fix up the home to make it easier to sell. However, the more banks spend fixing up the property and the lower the offer they accept, the more money the bank loses. Banks do not like to lose money.
If you choose to have the property inspected beforehand it is typically for your own information. It is unlikely the bank will make any repairs or lower the purchase price.
Additionally, if you buy an REO home, you should look into the property's public records. You want to be sure any liens on the property have attached to the person who previously owned the home and that you will not be responsible for paying any of them.
Typically, the bank takes care of the liens ahead of time, unlike properties at foreclosure auctions. The bank will negotiate with the IRS to get tax liens removed, evict current tenants and pay off fees owed to the homeowners association.
When you make an offer on an REO property, the bank will likely make a counteroffer. Be prepared to counteroffer the counteroffer. The bank wants to get the deal done as soon as possible. So, they will likely be willing to negotiate. The bank merely needs to demonstrate to its stakeholders that it did everything possible to recover profit.
Benefits of Purchasing an REO Home
Purchasing an REO home can be a great investment opportunity. It can also be a cheaper way to purchase a home for you and your family. If you get a property for a good enough price or in a condition that does not require a lot of fixing, REO properties make great rental property investment opportunities.
These are some of the benefits to purchasing an REO home:
- The bank is trying to make up the money that the previous owner of the home owed to them, which might be less than the current fair market value.
- The price of an REO home is usually lower than what the previous owner owed to them. That’s the amount the bank was trying to get at the auction. The bank already failed to get that amount, so the property will likely go for even less than that.
- If the price isn’t lower than it was at auction, the bank will likely have made improvements to the property, so it will be in better condition than it was at auction.
Before You Buy the Property
As mentioned above, an REO home might be a great deal. By the same token, it might not be. You should do your research on the property and make sure it is worth at least as much as you’re paying. Preferably, you should aim to buy a property worth more than what you’re paying for it.
Jeff Turner is licensed under CC BY 2.0.