What Is REO Occupied and What Does It Mean for Buyers?

Defining REO Occupied

Real Estate Owned (REO) refers to property a bank or lender acquires through foreclosure. This happens after a borrower defaults and the property fails to sell at auction. The lender then takes full ownership, making it an REO asset.

An “occupied” REO property means individuals still reside in the home despite the change in ownership. This distinguishes it from vacant REO properties and adds considerations for the lender and buyers.

Common occupants include former homeowners who haven’t vacated after foreclosure, possibly due to a lack of housing or inability to relocate. Tenants renting from the previous owner are another common type. These tenants often have legal protections under federal and state laws, affecting the timeline for gaining full possession.

Occupants add complexity to the REO process, impacting property access, condition assessment, and ownership transfer. Lenders typically aim to sell vacant properties to streamline sales, making occupant removal a significant step.

Methods for Vacating Occupants

Lenders must address existing occupants to prepare an REO property for sale. If occupants don’t leave voluntarily, the lender often initiates a formal legal eviction process, an unlawful detainer lawsuit. This action aims to regain property possession through court order.

Eviction steps involve the lender serving occupants a notice to vacate with a specified timeframe. If occupants don’t comply, the lender files an unlawful detainer complaint. A court hearing follows, leading to a judgment.

If the judgment favors the lender, a writ of possession is issued, authorizing law enforcement, typically the sheriff, to remove occupants. The sheriff’s lockout is the final step, where law enforcement physically removes occupants and changes locks after posting a final notice. This process is governed by state and local laws, varying in notice periods and timelines, often taking weeks to months.

An alternative to formal eviction is “cash for keys,” where the lender offers a financial incentive for occupants to voluntarily vacate. The agreement typically requires occupants to leave the property clean and undamaged by a specified date, surrendering all keys.

Cash for keys benefits both parties: the lender avoids time-consuming, costly eviction, and the occupant receives funds for relocation expenses like moving costs or a security deposit. This approach expedites vacancy, potentially saving the lender thousands in legal fees and property preservation costs during a prolonged eviction.

Navigating the Purchase of an Occupied REO

For buyers, an “occupied” REO property introduces unique considerations. Property viewing can be challenging, as occupants may restrict access, making interior showings difficult. Buyers might only perform exterior assessments, relying on public records or old listings to gauge condition.

Assessing the property’s true condition is difficult without full interior access. Occupied properties may have deferred maintenance or damage not visible from the exterior. REO sales are almost always “as-is,” meaning the buyer assumes responsibility for all repairs. This lack of detailed information necessitates caution and budgeting for potential hidden repair costs.

In most cases, the lender assumes responsibility for vacating the property before closing. Buyers generally purchase a vacant REO property, even if previously occupied, as lenders prefer to sell properties free of occupants to simplify the transaction. Buyers should confirm this arrangement in the purchase agreement to avoid unexpected responsibilities.

Vacating occupants, whether through eviction or cash for keys, can significantly delay the closing timeline. Even if the buyer isn’t directly involved, the sale cannot finalize until the property is empty. Delays can range from weeks to months, depending on occupancy specifics and local legal procedures.

Given these complexities, thorough due diligence is paramount for any buyer considering an occupied REO property. This includes reviewing disclosures, understanding the lender’s sales process, and being aware of potential delays. While such properties can sometimes be acquired at a discount, the associated risks and extended timelines should be factored into the investment decision.