What is an REO Property?

Posted by Ryan Tollefsen on Friday, September 21st, 2012 at 9:08am.

You may have heard about REO sales before, but are they really a great deal? The acronym “REO” stands for Real Estate Owned. An REO home is a home that has gone through the foreclosure process, been available for auction with no buyer, and has now reverted back to the bank that held the previous mortgage. The general consensus about REO’s is that they are a good deal and a great investment; however this may not necessarily be the case.

To start off, some may have confused the term “REO” with a “foreclosure sale.” These are not the same. A foreclosure sale is the sale of a home that has been foreclosed on; generally these will be advertised in newspapers and will occur on the steps of the county/borough/municipality courthouse in which the property is located.  A foreclosed property will have an opening bid, a minimum amount to cover the loan balance and interest and any costs associated with the foreclosure. Many foreclosure sales do not get bids and do not sell, this is when the property will transfer back to the bank holding the old mortgage and it becomes a Real Estate Owned property. The mortgage is abolished and the bank now owns the property.

So now what? Banks are not normally thrilled about owning real estate, there are evictions to deal with and utilities to pay each month, possible liens and overdue taxes or association dues that they now have to absorb. Banks will market the properties for sale almost immediately to try and get them sold for the best price possible, many will work with 3rd party “asset management” companies that will either sell the REO properties themselves or hire a Realtor that specializes in REO sales.

If you are thinking of purchasing an REO property, make sure to hire an experienced Realtor and do your research. While some REO homes may be lower priced compared to similar, more traditional properties, they will not necessarily be a good deal.  Many will require extensive cleaning and repairs, heavy exterior clean-up, trash removal, etc. Most people who lose their homes to foreclosure tend to abandon all maintenance responsibilities once they know they will be evicted.  Some people who are losing their homes will remove and sell the home’s cabinetry and appliances, lighting and plumbing fixtures, and some will even make a deliberate effort to destroy their home just so it is harder for the bank to resell. Banks will not make repairs and these homes will be sold in an “as-is” condition.  So have your Realtor perform a comparative market analysis to determine the fair value of the home, keeping in mind the potential cost of repairs and cosmetics when writing an offer.

A few points to keep in mind if purchasing an REO property:

  1. Be patient: Generally if you write an offer, expect a counter offer back at a higher price. Most banks will have to show documentation to their supervisors and higher investors (such as Fannie Mae or Freddie Mac) that they made an effort to sell the property for the highest price possible. It is easy to counter back, and be prepared to wait longer than normal for an acceptance. With traditional sales you will have a few days to hear back from a single seller; with REO’s the price has to be approved by the bank’s REO department, their supervisors, their investors, their asset managers, usually it will have to go through several different individuals.
  2. Ask for inspection reports: It is also a good idea when writing an offer, have your Realtor ask the listing representative for the REO property if there are any inspections or reports on file; there just may be findings from a previous offer that can save you a couple hundred bucks in not having to order new inspections down the road.
  3. Ask for repair allowances:   Even though the banks sell these properties “as-is,” you can always ask for repairs or allowances in your offer. Generally a bank will not pay for such costs, but it can’t hurt to ask.  In some circumstances a bank might cover a few items just to make the sale go through and have the home taken off their hands.

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