What Does REO Occupied Mean in Real Estate?

Real Estate Owned (REO) properties are a distinct segment within the housing market, arising when a lender takes possession of a property after a foreclosure auction fails to attract a successful bidder. When such a property remains inhabited, it is termed “REO occupied,” presenting unique circumstances for potential buyers. Unlike standard real estate transactions, these properties involve complexities due to occupants, influencing property access and the timeline for gaining full possession.

Defining “REO Occupied”

An REO property is a home owned by a lender, such as a bank or government agency, after the original borrower defaults on their mortgage payments and the property does not sell at a foreclosure auction. The “occupied” aspect means people are still living in the home despite the lender’s ownership. Occupants can include former homeowners who have not yet vacated, tenants with valid lease agreements, or even unauthorized individuals known as squatters.

The eviction process for the former homeowner is a separate legal step the lender must undertake after acquiring the property. Lenders may offer a “cash for keys” incentive to encourage occupants to leave voluntarily and quickly, which can range from a few hundred to several thousand dollars, commonly between $500 and $5,000. This strategy can be more cost-effective and faster than formal eviction proceedings. If the property was a rental, existing tenant leases may still be valid, requiring the new owner to honor them for a period.

Key Considerations When Evaluating Occupied REO Properties

Evaluating an occupied REO property requires a different approach compared to a vacant home, primarily due to limited access for inspections. Potential buyers often cannot conduct a thorough interior inspection before making an offer, meaning hidden damages or repair needs might not be immediately apparent. This lack of access necessitates a comprehensive exterior assessment, looking for signs of deferred maintenance or potential structural issues.

Determining the legal status of the occupants (whether they are former owners or tenants) is important, as this impacts the lender’s responsibility and the buyer’s future obligations. Lenders typically aim to deliver a vacant property, but understanding the occupant’s status helps anticipate potential delays or legal complexities. There is also a risk of property damage by disgruntled occupants, particularly if they are aware of the impending sale or eviction. Due diligence should include researching the property’s history, including any prior attempts at eviction or “cash for keys” negotiations, and understanding local eviction laws.

Navigating the Purchase of an Occupied REO Property

Purchasing an occupied REO property generally involves submitting an offer directly to the lender, often through a real estate agent specializing in REO properties. These properties are typically sold “as-is,” meaning the lender will not undertake repairs. Offers may include specific contingencies related to occupancy, and lenders often prefer cash offers or those with substantial earnest money deposits to demonstrate serious intent.

A common expectation is that the lender will deliver the property vacant before closing. This means the buyer may need to wait for the completion of the eviction process, which can be time-consuming, potentially extending the closing timeline by several months. The lender or their designated property management company is responsible for coordinating the legal steps for occupant removal, including serving notices and, if necessary, involving local law enforcement for the final eviction. In rare cases, a buyer might acquire an occupied property, particularly if there is a valid tenant lease that must be honored under federal or local tenant protection laws, such as the Protecting Tenants at Foreclosure Act, which generally requires a 90-day notice to vacate for tenants.