What Is an REO Property & How Do You Buy One?
Gain clarity on REO properties. Understand what these bank-owned assets are and navigate the unique path to their successful purchase.
Real estate owned (REO) properties are homes a mortgage lender or bank has taken ownership of. Understanding REO properties helps those exploring various home buying avenues.
What Defines an REO Property
An REO property is real estate directly owned by a bank, mortgage lender, or government entity. This occurs after a property goes through foreclosure and fails to sell at public auction. The lender then assumes ownership, adding it to their balance sheet.
An REO property is distinct from a property “in foreclosure” or a “short sale.” In foreclosure, the homeowner still owns the property, though the lender has initiated proceedings. A short sale involves selling for less than the mortgage owed, with lender approval, to avoid foreclosure. With an REO property, the lender has completed foreclosure and taken full possession, clearing liens and occupants.
The Path to Bank Ownership
The journey to becoming an REO property begins when a homeowner defaults on mortgage payments. Missing several payments, often 120 days or more, can trigger formal foreclosure proceedings. This legal process allows the lender to recover the outstanding loan balance.
The next step is typically a public auction, sometimes called a sheriff’s sale or trustee’s sale. If no third-party bidder purchases the property at a sufficient price, the lender reacquires it. At this point, the property officially becomes real estate owned by the bank. Banks are motivated to sell these properties quickly, as holding them incurs ongoing costs like property taxes, maintenance, and the risk of vandalism.
Purchasing an REO Property
Acquiring an REO property involves a specific process. Buyers can find these properties on bank websites, through real estate agents specializing in REO sales, or on online platforms like the Multiple Listing Service (MLS). Government-backed entities like Fannie Mae and Freddie Mac also list their REO properties on their websites.
The buying process usually involves submitting an offer directly to the bank. Offers are often reviewed by asset managers, and negotiations may occur. REO transactions are frequently sold “as-is,” meaning the lender will not undertake major repairs. While the lender usually clears any outstanding liens, buyers should conduct a thorough title search to confirm clear ownership.
Prospective buyers should prioritize a comprehensive home inspection to understand the property’s condition and estimate potential repair costs. REO transactions often include specific bank-mandated addendums that can alter standard contract terms, sometimes limiting buyer rights or imposing strict timelines. Reviewing these addendums carefully with a real estate professional is important.