Real Estate Owned Homes: A Practical Guide to Buying REO Properties

Navigating today’s real estate market can be daunting, especially amidst rising interest rates, tight inventory, and cooling housing trends. However, for those willing to explore innovative solutions, Real Estate Owned properties – often referred to as Bank Owned properties – present a promising opportunity. Both seasoned investors and first-time homebuyers can unlock significant potential by understanding REO properties and how to acquire them.

What is an REO Property?

The term ‘Real Estate Owned’ might seem complex, but it’s relatively simple. When a homeowner defaults on their mortgage, and a subsequent foreclosure auction fails to result in a sale, these properties revert to the lender’s ownership, thus becoming real estate owned or REO. Banks and financial institutions, which are not typically in the game of property management, find themselves with these homes and are eager to sell their assets to recoup losses.

If you’re looking for a smart investment in real estate, consider REO properties. These properties are gaining traction in the market due to their unique position and advantages. Here are some reasons why you should consider investing in REO properties:

• Competitive pricing: REO properties are typically priced well below market value, making them an attractive option for buyers looking for a good deal.
• Clear titles: With no outstanding liens or unpaid taxes associated with them, REO properties simplify the buying process and provide peace of mind to buyers.
• Negotiation potential: Banks are highly motivated to sell these assets, often leading to increased flexibility in price and terms.

Investing in REO properties offers a unique value proposition with competitive pricing, clear titles, and negotiation potential.

What are the advantages of buying bank-owned properties or REO homes?

One of the primary advantages of buying a bank-owned REO property is that investors are purchasing a property without liens or other encumbrances.

Before lenders make REO properties available for sale, they typically expunge all liens or claims against the property. Any cloud on the title — a second or third mortgage, mechanics liens, taxes or any other liens attached by creditors — are wiped out.

Moreover, skilled investors can negotiate with the lender’s loss mitigation department to discount the price to a fraction of its market value. Besides negotiating price, many buyers of REO properties also negotiate favorable lending terms below existing market rates.

For real estate investors and home buyers, bank-owned properties and REOs offer opportunities that are not available in the pre-foreclosure and auction phase of the foreclosure process. Buying bank-owned real estate offers the foreclosure buyer many advantages.

• Bank-owned properties are usually sold at below-market prices with great terms like low down payments and low interest rates;
• Buying bank-owned properties involves less risk and less competition;
• Foreclosures that are owned by banks are usually clear of any liens that may have been recorded against the property;
• Since the seller of REO homes is also the lender, you can negotiate with the bank to have them pay for all or some of the closing costs;
• Bank-owned properties are usually vacant because the banks have evicted the previous owner, saving the investor or homebuyer time, money and emotional toll involved in the eviction process.

What are the Challenges with REO Properties?

Like any investment, purchasing an REO property comes with its own set of challenges. While the allure of REO listings is undeniable, potential buyers should approach them with caution and awareness.

Here are some considerations to be aware of:

• Property condition: REO properties are typically sold “as-is,” meaning they may require significant repairs or renovations. It’s important to thoroughly inspect the property and factor in any potential costs for improvements.
• Financing difficulties: Securing financing for an REO property can be more challenging than traditional home purchases. Lenders may have stricter requirements or limited loan options for distressed properties.
• Competition: REO properties often attract multiple buyers due to their lower prices. This can result in bidding wars or the property being sold quickly, requiring buyers to act swiftly and decisively.
• Limited disclosure: Unlike traditional home sales, REO properties may give limited or no disclosure from the seller regarding the property’s history, condition, or potential issues. Buyers should conduct thorough research and consider hiring a professional home inspector.
• Title issues: Some REO properties may have title issues or liens that need resolution before the sale can be completed. Buyers should run a title search and work with a qualified attorney to ensure a clear title transfer.

Where can I find REOs?

There are several ways to locate bank-owned REO properties. First, you can search for thousands of bank-owned properties online on our website. Another way to locate REOs is to go directly to lenders themselves. Each lending institution, however, handles REO properties differently. Some lenders post bank-owned real estate lists on their websites. Smaller local banks usually have one individual who is in charge of the bank’s REO inventory.

Larger regional and national lending institutions, on the other hand, have large departments that deal exclusively with selling bank-owned properties. Frequently, this department is referred to as the loss mitigation department. The job of the loss mitigation department is to mitigate the loss or minimize the damage caused by loans that have defaulted, which lenders call non-performing loans.

How to Buy an REO Property?

Essentially, there are three different stages at which you can buy a foreclosure property:

• First, investors and homebuyers can purchase a foreclosure property in the first phase of default — before a foreclosure auction takes place;
• Secondly, investors can purchase a property in at the public foreclosure auction (more about that process below)
• Finally, a foreclosure property can be purchased from the bank or lending institution if no one bids at the public sale and the bank repossesses the property

Anyone can buy a bank-owned REO. The challenge for real estate investors is to reach the person who can make the decision to sell the bank-owned property. Each lending institution has different rules and requirements on how they sell bank-owned real estate. Contact the lender and find out what they require to purchase an REO property.

Most banks are eager to negotiate. After all, the lender has the biggest financial stake in a foreclosed property. The lender made an 80 percent, 90 percent, or even a 100 percent loan to the borrower to purchase the property. Therefore, the lender who may have a growing inventory of bank-owned properties is a motivated seller. Lenders want to remove the properties from their inventories. Bank officers in the loss mitigation department will want to work with investors and home buyers because they want to minimize the bank’s loss. Some investors call bank-owned properties repos, which is short for repossessions.

Frequently, lending institutions hire real estate brokers to market and sell their REO inventories. Smaller local banks may use one real estate broker to handle their REO properties. Larger regional and national banks employ hundreds of brokers to handle their inventory of thousands of foreclosed bank-owned REOs.

Buying a lender’s real estate owned property is a lot less complicated, involves less competition and usually doesn’t expose investors to as much risk as buying in other phases of the foreclosure process. Investors should consider working with several lenders.

How to Buy REO or Bank-owned Homes at Auction

As mentioned, when banks take back foreclosed-upon homes, they sometimes hire auction companies to unload these properties. Banks sell foreclosed properties at auctions to reduce their inventory of REO properties and clear their books of outstanding debt.

Getting Started Buying Bank-Owned Properties

Bidders must be registered prior to the auction with the company conducting the auction. Generally, winning bidders must immediately give the auctioneer a deposit, payable in cash or cashier’s check only. Deposits are typically between 5 and 10 percent of the outstanding loan amount, and the winning bidder must be able to close in cash within 30 days. In some cases, however, you may be responsible for payment in full upon winning the auction. The deposit amount varies from state to state and the auction company handling the sale. Some states require winning bidders to pay the full sales amount the same day as the auction, as do some online auction platforms.

In the past, many real estate investors preferred to bid on and buy in person, but today many auctions occur online. Review the terms of use on any auction platform you plan to use to buy foreclosures at auction before bidding to make sure you understand how the auction will proceed and what your responsibilities will be in the event that you win the property.

Tips for Buying REO Homes at Auction

There are other considerations for real estate investors bidding in REO auctions, too. All properties are sold “as is” and prospective buyers should inspect the homes prior to the auction, so they know what they are bidding on. Moreover, an owner or tenant living in the house may or may not be cooperative about moving out.

Lenders use auction companies because they move inventory quickly. But bank-owned foreclosures aren’t the only type of property on the auction block. Sometimes homes are sold at HUD auctions, IRS auctions, “repo” auctions or sheriff’s auctions. In some cases, the minimum bid on an REO home at auction will be equal to the outstanding loan amount, but this is not always the case. Depending on the type of auction in which you are bidding, winning the property could mean you are liable for other debts and liens on the home, including overdue taxes, back interest, attorney’s fees, and homeowner’s association (HOA) fines, fees, and dues. Your final cost may be higher than the “sticker price” on the property, so do your due diligence ahead of time to make sure you know exactly what you are bidding on.

Following are steps you can take prior to buying bank-owned homes at auction events:

1 – Inspect Properties Prior to Auction

Bank-owned properties offered at these foreclosure auctions are sold “as is,” meaning the buyer is responsible for any and all repairs. This means that inspecting the property before the auction is critically important. Contact the real estate listing agent or auction company to schedule an appointment to inspect the property. Drive around the neighborhood and look at the quality of the community. Also, talk with adjacent property owners and get as much information about the neighborhood and the previous homeowners as possible. Walk through the house and determine in writing how much it will cost to repair the property. Add the repair costs to your auction bid.

2 – Read the Fine Print

Carefully read all the terms and conditions of the foreclosure auction before attending the real estate foreclosure auction, or bidding online, especially any fine print. This information can usually be found in the auction brochure or on the company’s website. If you’re not sure about the language in the terms and conditions, have your real estate agent or attorney explain it to you. Make sure you understand bidder eligibility, financing, deposits, closing deadlines, closing costs, purchase agreements, disclosures and other bidding requirements. You will be legally bound by these contracts so make sure you understand them.

3 – Find Financing

After inspecting several properties and narrowing down your short list of homes, investors and homebuyers should secure financing. While many live auctions have lenders available onsite, it is a good idea to have your financing prepared in advance of the auction. If you can’t secure financing on a property within the required timeframe, your deposit payment will probably be forfeited.

4 – Register For The Auction

Many auctions — both online and live — require bidders to register either onsite or online. If you are bidding at a live auction, make sure to arrive early to get a good seat and to give yourself time to prepare for the auction. Check the auction company’s website before you attend a live auction and make sure the properties you are interested in bidding on are still available. Sometimes foreclosed homes are sold prior to the auction.

Two Types of Deeds Granted in REO Auctions

When you purchase an REO property at auction, you may receive a general warranty deed or a special warranty deed. You must know the difference!

A general warranty deed shows that the title is clear, whereas a special warranty deed simply states there have been no title issues with the property since the bank took ownership of the property. Special warranty deeds do not mean that there are no title claims or pre-existing liens on the property, so real estate investors should research every property’s history carefully, including doing everything possible to ascertain if the title is clear, prior to bidding.

Navigating the Aftermath: Post-Purchase Considerations for REO Properties

After successfully buying an REO property, many investors and first-time homebuyers may ask, “What’s next?” Here are some important considerations to keep in mind:

• Plan for necessary repairs and renovations: REO properties are typically sold “as-is” and may require substantial restoration work. Engage reliable contractors, understand renovation costs, and manage your budget effectively.
• Navigate complex insurance procedures: Insuring an REO property can be more challenging due to potential risks. Work closely with an insurance advisor to understand the best policies for your property.
• Understand the rental landscape: If you plan to rent out your REO property, research the local market, understand demand and supply dynamics, and set a competitive rental price.
• Be prepared to handle legalities: Owning a bank-owned home involves more legal paperwork. Given the paperwork, consider consulting with a real estate attorney to ensure compliance with legal obligations and protect your rights.

Essential Tips for Successful REO Property Investment

Investing in REO properties presents a unique opportunity for both seasoned investors and first-time homebuyers. These bank-owned homes often come at a discounted rate, providing the potential for high returns. However, the journey to purchase and manage an REO property involves navigating through various challenges ranging from financing difficulties to property conditions and legal intricacies.

Conducting comprehensive research, enlisting the help of experts, and taking a systematic approach to due diligence can significantly mitigate risks and make the process smoother. With the proper preparation and resources, you can tap into the potential of REO properties, turning challenges into opportunities and yielding substantial rewards in your real estate ventures.

Checklist for Buying a Bank-Owned or REO Property

A lot of things go into buying REO properties. New real estate investors often expect the process to be simple, but there are many moving parts! The best way to make sure you don’t miss anything when buying bank-owned (REO) properties is to make a checklist for the process.

Here is a list of things you can do to improve your chances of successfully purchasing a bank-owned REO:

Inspect the Bank Owned (REO) Property

Most foreclosure properties are referred to by investors as “distressed” properties because the owner and, as a result, the property, were distressed by the loan delinquency and foreclosure. When you are buying bank-owned (REO) home, you must remember that the owner probably was financially unable to care for the property to the best degree possible if they were behind on their loan payments. As a result, the property may need repairs. You must identify them and factor in the cost of repairs before you buy an REO home.

Bank-owned foreclosure homes are often sold “as is,” which means that a discount on the purchase price can easily be eaten up by unforeseen expenses — such as repairs not immediately apparent in an exterior inspection. Even if there are not major, obvious repairs waiting, you may find that regular maintenance has been neglected, causing less-visible damage. Some homeowners who lose their property to a lender even damage the property before they leave. Hire a licensed home inspector to give you a written estimate of the cost to repair the property. Budget that number into your purchase price. Repair costs can be used later in your negotiation with the bank to reduce the asking price.

Do a Title Search

Once you have located a potential deal, search the public records for liens and outstanding taxes. You can perform a preliminary check of title on RealtyTrac and then hire a title company to run a full, insured title search before closing the deal.

Remember, liens on the property can drive up the purchase price. There are several types of common liens you may find placed against a property:

• Tax liens for property taxes or state or federal taxes
• Utility liens for unpaid water bills
• Mechanics liens or contractors’ liens against the property.

These liens remain intact until the money is paid, which means that you may have to pay off the liens on the foreclosed property you are buying — even though you’re not the one who didn’t pay the property taxes. Banks should clear the title before selling but never assume this is the case — just as you would if you were buying a property from anyone else.

Be prepared and willing to negotiate

Investors should be prepared to negotiate a lower down payment, a lower interest rate, a reduction in closing costs and a lower asking price. Many lenders may be willing to waive some closing costs or even offer a break on the interest rate or the down payment. Moreover, some lenders might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Anything is possible, but you will never know if you don’t ask. Don’t be afraid to ask for a better price and favorable terms.

Support your offer with facts and photos

Although most banks want to unload their foreclosed properties, they won’t necessarily do so cheaply. So you aren’t guaranteed a fabulous price. But remember you’re dealing with an eager seller. Even though the bank’s REO manager or their listing agent might suggest that the list price is “firm,” never be afraid to negotiate price — especially if the foreclosed bank-owned home needs repairs. When submitting a low offer, you need to substantiate the reduced price in writing and document your case. You should furnish photographs and cost estimates for repairs to support your offer amount

Investigate your options for financing

If you have good credit and do not already have numerous loans on other investment properties, your bank may be willing to loan you a large portion of the purchase price for the bank-owned (REO) property. Although you should expect the down payment on an investment property to be higher than it would be on an owner-occupied property, you still can try to discuss the interest rate and down payment with your bank. Sometimes credit unions or long-term private lenders will offer you good terms as well.

RealtyTrac Can Help You Find the Best Bank-Owned (REO) Properties

There are always good opportunities available to a determined real estate investor, but you have to be willing to look for them. Before you begin, prepare yourself! You will probably have to evaluate and even make offers on several REO properties before your offer is accepted. But if you persevere, with careful planning and preparation you will ultimately purchase a bank-owned property and build your investment portfolio.

RealtyTrac is here to help you buy investment properties whether this is your first deal or your 500th. Our vast database of national foreclosures, REOs, and is perfect for helping you find the best real estate investment for you.