Real estate owned (REO) properties offer the opportunity to purchase homes for attractive prices to home buyers who can navigate the specifics of how these properties come to market. REOs usually have been foreclosed on by lenders who are seeking to turn them into cash as quickly as possible. However, buying an REO requires navigating a process that is significantly different from a conventional purchase.
For help understanding how buying an REO could affect your financial plan, consider working with a financial advisor
REO Basics
Most REOs have come under the bank’s ownership after a foreclosure brought about by the previous owner’s default on a loan secured the property. They may also wind up with the bank after the death of a homeowner with a reverse mortgage, or if the heirs of a deceased borrower would rather give the property to the bank than try to sell it keep making payments on it.
Banks usually attempt to auction foreclosed properties. However, most foreclosures not sell at auction. When an auction is unsuccessful, the bank will list it for sale as an REO. From the buyer’s perspective, purchasing an REO is broadly similar to buying a home from an owner-occupant, but there are also a number of important differences.
How to Buy an REO
Banks are motivated to sell REOs and may price property below market in order to encourage a quick sale, banks maintain considerable control over the selling process and it is necessary to work with them effectively in order to make a successful buy.
For this reason, people who buy REOs are often advised to work with real estate agents who specialize in these transactions. An REO-experienced agent can keep the buyer informed about what to expect and craft an offer that is likely to be accepted.
Getting pre-approved by a lender is also usually part of buying an REO. Banks may refuse to even accept offers from buyers who haven’t received pre-approval letters from a lender indicating that they have the financial wherewithal to complete the purchase.
Finding REO properties is similar to finding other real estate for sale. The Department of Housing and Urban Development (HUD) maintains online lists of REO properties for sale by government agencies. Commercial banks may also have their own online listing sites. Public listings on popular sites like Zillow also allow shoppers to search for REO listings.
After identifying a promising property, the buyer of an REO will carefully assess the property’s condition. That’s because REOs are sold as-is, with the seller making no promises about whether the home is in good condition or, perhaps, requires major repairs. Buyers generally conduct their own inspections, when the bank permits it and those who can accurately estimate the cost of any needed repairs tend to do best when purchasing REOs.
REOs are typically sold with a different sort of deed. The general warranty deed used in typical home buying transactions ensures that there are no other liens, unpaid property taxes or other legal issues affecting the property and that the seller has the right to sell it. The deed used in REO sales is a quit claim deed, or special warranty deed, which only transfers the property without making any guarantees about pre-existing claims on the property. For this reason, many buyers pay a title company to conduct a title search to discover any prior claims that could derail the sale.
When it comes time to make the offer, the process is also different. The bank may have an extended period during which it entertains offers, and may communicate little or not at all to the bidders even after a bid is accepted. Multiple offers are common.
REO Pros and Cons
Buying an REO can save money, but since the homes are in as-is condition, it can also be risky. The seller hasn’t lived in the home and doesn’t have to disclose any problems with it. Buyers may have only limited inspection rights. And the costs of repairs, if not accurately estimated, can turn a seeming bargain into an overpriced burden.
Banks also often require sellers to follow their own guidelines, which are set up to protect the bank and not the buyer. Buyers often have no option period during which a bidder can opt out of the arrangement without losing the earnest money.
Sellers also operate on their own schedules. They may take weeks to respond to bids or other communications, then require buyers to act by a certain date or face penalties. It can take considerably longer to reach closing on an REO than on a typical home purchase. And after closing, it may take more weeks to turn a neglected foreclosed property int a habitable residence.
The Bottom Line
REOs often sell for below market prices, but come with many traps for the unwary and inexperienced. REO buyers often choose to work with real estate agents who specialized in REOs. And while they may be financial bargains, REO may not be immediately ready for the buyer to move into. Sales also tend to take longer and may have to conform to special procedures the seller has created.
Tips on Home Buying
- A financial advisor can help you fit a home purchase into your personal financial plan. Finding a qualified financial advisor doesn’t have to be hard. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Although REO sellers are in the mortgage business, buyers are usually free to arrange financing from any lender. As with any home purchase, shopping around with several lenders is an effective way to save money and ensure that the financing is on the most advantageous terms.
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