What Is an REO Occupied Property? The Meaning
Understand REO occupied properties: real estate owned by lenders but still inhabited. Learn the nuances, challenges, and what it means for buyers and sellers.
An REO occupied property represents a unique segment within the real estate market, arising from property ownership transitions after foreclosure. It describes a home a mortgage lender has officially taken ownership of, but where individuals continue to reside. This situation introduces distinct challenges and considerations for all parties involved, including the lender, the occupants, and potential buyers.
Defining REO Occupied Property
REO stands for Real Estate Owned, referring to a property that has reverted to the ownership of a lender, such as a bank or mortgage company, after a foreclosure auction where no third-party buyer purchased it. When a homeowner defaults on mortgage payments, the lender initiates foreclosure proceedings. If the property does not sell at the foreclosure auction, ownership transfers to the lender, classifying it as an REO asset.
An “occupied property” signifies that individuals are still living in the home even after the lender has legally acquired it. This occupancy can stem from various circumstances, including former homeowners who have not yet vacated, tenants with valid lease agreements, or unauthorized individuals who have taken residence. While a lender gains legal ownership, gaining physical possession is a separate process.
Lenders prefer not to hold occupied REO properties because it complicates preparing and selling the asset. Occupancy can lead to delays, potential legal costs associated with eviction, and uncertainty regarding the property’s condition. Interior inspections may be difficult or impossible while residents are present.
The presence of occupants can deter potential buyers and often results in the property being sold at a lower price than a vacant one.
Types of Occupants and Their Status
Occupied REO properties can house different types of residents, each with varying legal standing.
Former homeowners are a common type of occupant who may remain in the property after foreclosure. They might delay vacating due to a lack of alternative housing, a misunderstanding of the foreclosure process, or an attempt to prolong their stay. While they no longer hold legal title, their continued presence necessitates formal procedures to regain possession.
Another group comprises tenants who had a valid lease agreement with the previous homeowner. These tenants may have legal protections that allow them to remain in the property for a certain period, even after a foreclosure. Federal laws, such as the Protecting Tenants at Foreclosure Act (PTFA), generally require new owners to provide tenants with a notice period, typically 90 days, before initiating eviction proceedings, and in some cases, to honor existing leases. The lender may inherit landlord responsibilities until the lease expires or the tenant vacates.
Unauthorized occupants, often referred to as squatters, represent a third category. These individuals do not have a legal right or lease to occupy the property. Their removal typically requires a formal legal eviction process initiated by the property owner, which can be complex and vary based on local regulations.
Lender Actions Regarding Occupancy
After a lender takes ownership of an occupied REO property, their objective is to gain full possession to prepare the asset for sale. The presence of occupants can complicate this process, leading lenders to employ specific strategies.
One common strategy is offering “cash for keys” programs. Under this arrangement, the lender provides a financial incentive to occupants to vacate the property voluntarily and leave it in good condition. This approach often benefits both parties by providing occupants with funds for relocation and allowing the lender to avoid the time and expense of a formal eviction process. The amount offered can vary, typically ranging from a few hundred to several thousand dollars, depending on property value and the anticipated cost of eviction.
If voluntary agreements are not reached, the lender initiates a formal legal eviction process. This involves filing a lawsuit in court to legally remove occupants. While the specifics of eviction procedures vary by jurisdiction, it generally involves serving legal notices, obtaining a court order, and potentially involving law enforcement to enforce the order. This legal route can be time-consuming and incur significant legal fees and administrative costs for the lender. The lender’s goal is to transition the property to a vacant status efficiently, minimizing holding costs and facilitating a quicker sale.
What Potential Buyers Should Know
Individuals considering the purchase of an occupied REO property face unique considerations that differ from a standard real estate transaction. Understanding these aspects is important before making an offer.
Buyers should confirm the occupancy status of an REO property before making an offer. Due to the presence of occupants, interior inspections may be limited or unavailable. Buyers might acquire the property “as-is” without a full understanding of its internal condition or potential repair needs. This requires buyers to rely on exterior assessments and available public records to estimate risks.
The responsibility for gaining possession of the property typically rests with the lender before closing. Buyers should verify the lender’s plan for clearing occupancy as part of their due diligence. There can be potential delays in closing or taking possession if occupants are still present, which can extend the timeline significantly. Buyers must be prepared for the possibility that the process of gaining full access could take several months or longer.
While occupied REO properties might sometimes be available at a lower purchase price compared to vacant homes, this discount often reflects the added complexities and potential costs a buyer might face. These complexities can include the need for legal counsel to navigate eviction laws, potential repair costs due to deferred maintenance, or even damage by disgruntled occupants. Buyers should budget for these expenses and understand that patience and careful planning are necessary.