What Are REO Properties and How to Buy Them
Gain a clear understanding of real estate owned (REO) properties and the methodical approach to their acquisition.
Real estate owned, or REO, properties represent a distinct category within the housing market. These properties are homes that have reverted to the ownership of a lender, typically a bank, after an unsuccessful foreclosure auction. Understanding REO properties is important for potential homebuyers and investors navigating unique acquisition processes. This article explores what REO properties are, how banks manage them, where to find them, and the specific steps involved in their purchase.
Understanding REO Properties
A property becomes real estate owned (REO) when a borrower defaults on their mortgage loan, leading to foreclosure. After the lender initiates foreclosure, the property is typically put up for auction to recover the debt. If no third-party bidder purchases the property for a sufficient amount, it reverts to the lender.
At this point, the property becomes an REO asset, with the bank or mortgage servicer holding the title. This status distinguishes REO properties from those in pre-foreclosure, where the homeowner still retains ownership, or short sales, where the property is sold for less than the outstanding mortgage balance with lender approval. The lender’s acquisition signifies the final step in the foreclosure process, converting the property from a non-performing loan to an asset.
Bank Management of REO Assets
Once a property becomes REO, the lender undertakes several steps to prepare it for sale. A primary objective is to clear any title defects or liens, ensuring a clear title. This often involves legal review and negotiations to resolve claims against the property.
Banks also assess the property’s physical condition and may undertake necessary repairs or maintenance to enhance marketability and ensure safety, avoiding extensive renovations. The bank then determines a listing price based on market value, property condition, and the outstanding debt balance. Their goal is to recover as much of their investment as possible.
Locating REO Properties
Buyers can locate REO properties through several avenues. Many are listed on the Multiple Listing Service (MLS), accessible via traditional real estate agents. Working with an agent specializing in REO properties can provide an advantage, as they often have direct connections with bank REO departments.
Many banks maintain dedicated REO departments and list properties directly on their websites. Government agencies, such as the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), or the USDA, also list REO properties acquired through foreclosure on government-backed loans. These online resources show available properties across various lenders and government entities.
The REO Buying Process
Purchasing an REO property begins with submitting an offer to the bank, similar to traditional real estate. However, banks often require addendums to the purchase agreement outlining terms that protect the lender. These addendums might include clauses stating the property is sold “as-is” and limiting bank liability for property condition or unknown defects.
The bank’s response time to an offer can vary from days to weeks, due to internal review processes. Buyers should anticipate a due diligence period, typically 7 to 10 days, to conduct inspections and appraisals, though the “as-is” nature means the bank may not agree to repairs. Financing for REO properties follows standard mortgage application procedures, requiring a pre-approval letter to accompany the offer.
Closing procedures for REO properties mirror conventional home sales, involving title searches, escrow, and fund transfers. However, some banks may designate specific title companies or closing agents. Completing the transaction involves signing all necessary documents and transferring the deed, making the buyer the new owner.