REO: A Guide to Real Estate Owned Homes
Real estate owned properties, or REO properties, are houses that have been seized by banks or other lenders from people who are unable to pay their mortgages. Mortgage loans are seen as an investment, because banks will earn money from the interest on the loan. So to salvage their investment, banks foreclose on homes with unpaid mortgages and sell the properties at foreclosure auctions. If a home doesn’t sell at the foreclosure auction, it becomes an REO property.
Why don’t foreclosure auctions always work?
Many auctions after a foreclosure fail to bring in any bids. The foreclosure prices are not set according to the home’s market value. The banks try to cover their losses and fees. The foreclosure minimum bid price usually includes the balance of the unpaid mortgage loan, interest owed, attorney’s fees, and costs generated by the foreclosure process. Especially in a soft real estate market, the asking price at auction could tower above market value. Hence, a bank can easily end up with a real estate owned property that it still needs to sell.
When do foreclosures become REO properties?
Once someone forecloses on a mortgage and a property becomes an REO, the lender will prepare the home for sale, including removing the occupants, clearing liens on the property, and determining a listing price. Generally, after the foreclosure, lenders do not do any upgrades or repair work on REO listings, which are sold “as is.”
When the REO property is ready for sale and the foreclosure is complete, the lender will work with a broker to put the real estate owned property on the market and look for homebuyers.
Finding a real estate owned listing
Typically, even if the lender has an excess inventory of REO property, it will not offer a house at an unbelievably low price. In most cases, the lender and the real estate broker have researched market fluctuations and recent comparable sales to determine a fair price for the REO. As with any property, you might find a great deal, but don’t expect an REO property to be severely undervalued.
To find real estate owned properties, you may have luck contacting lenders directly about listings for REOs. Some lenders may be willing to provide you with a list of their REO properties available for sale. However, working with a real estate agent is an easier, and often more reliable, way to find REOs. The real estate agent will be able to find several REO home listings in your area from more than one lender, and help guide you on the right price to offer for an REO home.
Making an offer on a real estate owned home
Buying an REO is a complex process. You will have to be a savvy negotiator to purchase real estate at a price you want.
An offer on an REO should include a cover letter, stated willingness to buy the home “as is,” and an escape clause that lets you out of the real estate deal if later inspection reveals extensive property damage. You usually won’t be able to inspect the REO before you send your offer.
To increase your chances of landing the REO property, make your offer for or close to the asking price. However, if your research reveals the REO is overpriced, you might decide to offer below listing price and explain your reasoning in a cover letter.
When you buy an REO, you can end up buying a good home at a good value. Given the level of complication, however, you will benefit from hiring a team of experts, such as a real estate agent, real estate attorney, and contractor, to help you navigate through the deal.