What Are REO Foreclosures and How Do They Work?
Understand REO foreclosures: what bank-owned properties are, how they transition to lenders, their features, and the steps to buy them.
How Properties Transition to REO
A property begins its journey toward becoming real estate owned (REO) when a borrower fails to meet their mortgage obligations. This typically occurs after several missed payments, often ranging from three to six months, signaling a significant default on the loan agreement. The lender then initiates the formal foreclosure process to recover the outstanding debt.
The foreclosure process starts with a notice of default, informing the borrower of their delinquency and the lender’s intent to foreclose. This is followed by a period where the borrower might have an opportunity to cure the default. If the situation remains unresolved, the property is usually scheduled for a public auction. At this auction, the property is offered for sale to the highest bidder.
If no bids are received at the public auction, or if the highest bid is less than the amount owed to the lender, the lender will take ownership of the property. This transfer of ownership from the defaulting borrower to the lender is the point at which the property officially becomes an REO asset. The lender’s primary objective is to mitigate their financial loss by regaining control of the asset securing the defaulted loan.
Characteristics of REO Properties
Once a property becomes REO, it is directly owned by the financial institution that held the mortgage, such as a bank or a credit union. The bank’s main goal is to sell this property efficiently to recuperate the funds they lost from the defaulted loan and the costs associated with the foreclosure. These properties are classified on the bank’s books as non-performing assets, and their continued presence can impact the institution’s financial health.
REO properties are almost always sold “as-is,” meaning the buyer accepts the property in its current condition, without the expectation of repairs from the seller. The condition of these properties can vary widely; some might be well-maintained, while others may have suffered neglect, damage, or even vandalism during the period leading up to and following foreclosure. It is common for these properties to require some level of repair or renovation.
Banks are motivated sellers and price REO properties competitively to attract buyers and facilitate a quick sale. They aim to recover their costs and may offer pricing that reflects the need for an expedited transaction, particularly if the property has been vacant for an extended period. Unlike properties sold at public auction, REO properties are listed on the multiple listing service (MLS), making them readily accessible through licensed real estate agents.
Purchasing an REO Property
Individuals interested in acquiring an REO property can begin their search by working with a real estate agent specializing in these transactions. These agents often have specific experience navigating bank-owned sales and can help locate suitable properties listed on the MLS. Buyers might also find REO listings directly on the websites of major banks or asset management companies.
When a buyer identifies an REO property, an offer is typically submitted through their real estate agent directly to the bank or its designated asset manager. Banks often have specific forms and requirements for offers that differ from standard real estate contracts. Earnest money deposits might range from 1% to 3% of the offer price. These forms detail the terms and conditions the bank expects for the sale.
Thorough due diligence is important when purchasing an REO property, given the “as-is” nature of these sales. Buyers should arrange for comprehensive inspections, including a general home inspection, pest inspection, and specialized assessments for issues like mold or structural concerns. An inspection period, typically 10 to 14 days, is granted within the contract for these evaluations.
Buyers must also research the property’s title and any potential liens, as the bank may not provide extensive warranties beyond a clear title at closing. While banks are motivated to sell, the negotiation process can be slower than a traditional sale due to internal corporate approvals. The closing process for an REO property is similar to a conventional real estate transaction but may involve additional bank-specific disclosures or administrative steps.