What Is an REO Property?

A real estate owned (REO) property is a listing that was foreclosed on and failed to sell in the auction phase. It’s now owned by a mortgage lender, mortgage investor or bank that wants to sell it as fast as possible. 

These bank-owned properties can vary greatly from charming and quaint to collapsing mold-filled frames. But people often consider buying REO properties because they’re looking for a diamond in the rough. 💎 

If you’re the type of person who sees potential everywhere you look, REO properties are a unique way to start investing in properties, flipping houses or even repairing what will be your dream home. 

We’ll explore in this article what you’ll need to know to get the best value on an REO property and how to protect yourself from buying a money pit.

How a Property Gains REO Status 

A house goes through several steps before it’s officially an REO property. Let’s look at the steps and distinguish how a house gets through the foreclosure process and ends up labeled as REO.

Payment default

It all starts when the owner of the property defaults on their monthly mortgage payments. Lenders generally give borrowers a grace period of 2 – 3 months, but if the payments aren’t made within the grace period, the lender will issue a notice of default. 

Notice of default

This notice states how much the borrower owes and sets a deadline for them to repay the missed payments and get back on schedule. 

Notice of trustee sale

If the borrower fails to meet these demands, the home becomes a foreclosed property. The lender sends a notice of trustee sale to the borrower and to the county clerk who will advertise the property for sale. 

The trustee sale, or foreclosure action, is a public auction, where potential buyers can come to bid on the property.

Trustee sale

At the trustee sale, the opening bid is set by a neutral third party, usually an escrow company. The bid is a fair price that covers existing payments or liens on the house. If someone buys the home at the trustee sale, it’s theirs.

Home becomes REO

If no one buys the house at the trustee sale, then the mortgage lender or financial institution gets ownership. Here’s where a home can become an REO property. 

The bank or lender will want to sell the house as soon as possible, so they’ll relist it and try to sell it this way.

As you can see, REO is not the same as a foreclosure. REO properties have gone through the foreclosure process but failed to sell in the auction. At that point, the lender or bank owns the property and has listed it for sale.

What To Consider Before Buying an REO Property

At first glance, buying an REO property may seem like a solid lower-cost investment. But be aware, there’s a lot to consider before you invest. Each REO property is unique and you owe it to yourself to look at the pros and cons of each REO property to determine if one is the right fit for you. 

Buying an REO home can be good if you have a low budget. However many REO properties need repairs, so study the condition of the property closely to ensure fewer surprises about potentially expensive repairs.

Pros of REO properties

There are many perks to buying an REO home that make them attractive to potential buyers. Here are a few common ones:

• Quick sale: Lenders and banks are highly motivated to sell their REO properties because holding them increases fees. Thus, they’re looking for a quick sale and will help shepherd potential buyers through the closing process. 
• Budget friendly: Because the bank is not looking to make a profit, but rather just to get the property off their books, REO homes are usually priced far below market value and can be good for small budgets.
• High Return: If you’re looking for an investment property to flip and rent out, then look no further. Because REO properties are cheap, with some repairs, you can usually rent or sell them to generate a greater profit than if you’d bought a standard house on the market. 

Cons of REO properties

There are also a few pitfalls to watch out for when buying an REO property. Here are the most common ones:

• Sold as-is: Most REO properties need repairs and are sold as-is, meaning the bank will not make any of the repairs. So, repairs become the buyer’s responsibility. While this may mean the house is cheaper, you could end up paying a lot for repairs. 
• No Seller Disclosure: Because the seller is a bank rather than an individual homeowner, they don’t always know if there’s anything wrong with the property. Plus, they’re not required to provide a Seller’s Disclosure detailing any concerns. 
• Potential liens: The previous owner may have owed property taxes or had other liens on the house. If you buy an REO property with liens, you could be responsible for satisfying those liens. 
• More competition: Many real estate investors and house flippers understand that REO properties can be of great value. Because of this, banks often get a lot of offers on these homes, so you’ll need to be prepared for some serious competition. 
• Possible occupants: The 2009 Protecting Tenants at Foreclosure Act (PTFA) requires giving any tenants that currently dwell in the property a 90 days’ notice to move.^[1] So if the foreclosure is quick, there may be people still living in the home, which could delay closing.

How To Buy an REO Property

Buying an REO property is similar to other home purchases, but with a few extra steps. However, since REO properties aren’t being sold by a seller who has experience with the house, you’ll need to double-check a few things to make sure you’re getting the best value for your money. 

The tricks are knowing how to find them, getting a thorough home inspection and performing a title search.

Find an REO property you like

First up, finding your diamond in the rough. There are a few ways you can find REO homes for sale, but the top three are: 

• The multiple listing service (MLS), a national database for connecting buyers and sellers
• Federal listings, like the Department of Housing and Urban Development, will list homes that are REO but managed through government lenders
• Local banks that temporarily manage and dispose of REO properties

Hire a real estate agent with REO experience

While it may be tempting to tackle the process on your own, having a knowledgeable buyer’s agent by your side can make the difference between buying a money pit and making a solid investment. 

Look for a real estate agent who has experience with REO homes and who can support you through the process. Your agent will help you with each step and be the liaison between you and the bank or mortgage lender. 

Don’t skip the home inspection 

Because the bank or mortgage lender owns the house, they are not responsible for any repairs or required to give you a Seller’s Disclosure explaining what’s wrong with the property. So, it’s up to you, the buyer, to discover and handle anything that needs repairs or renovations. 

This makes the home inspection crucial since it helps identify exactly what needs repairs and what those repairs could cost. This, in turn, allows you to budget for the repairs and determine whether or not the property truly is a good investment.

Perform a title search 

Since the bank owns the REO property, they won’t necessarily know the property’s history or even if the previous owner had full legal ownership. 

A title search crawls through public records to confirm that no one else has any right or claim to the property. The last thing you want is to buy a property that has unpaid property taxes or other claims to the house. 

You could even take it one step further and protect yourself by buying a title policy. Title insurance helps to mitigate any claims or liens that may arise in the future.

Is an REO Home Right for Me?

REO properties can be an attractive way to get a cheap home, buy an investment property or get a house to flip. But, you have to watch out for a few pitfalls. If you work with an experienced real estate agent and prioritize the title inspection and house inspection, you should be good to go. 

Enjoy shopping for homes that may be your next hidden diamond.