Distressed properties can be a very attractive option for both homebuyers and investors. Yet when faced with the hustle and bustle of a foreclosure auction, some buyers can find themselves overwhelmed. Often, dealing with the bank directly can allow you to pace your home buying decision and even provide a better deal. This is where REOs come into play.
What Is an REO Property?
Real estate-owned (REO) properties, also known as bank-owned, are properties that have not sold at a foreclosure auction, and as a result, they are owned by the foreclosing bank.
Before a property becomes an REO, it goes through several stages:
- Payment default: the owner of the property fails to make a payment on their mortgage loan. If 90 days go by and the owner has yet to resolve the overdue payment, the bank will send out a Notice of Default and a lien will be activated on the property.
- Foreclosure: the bank will begin the legal proceedings against the owner and the property will go into foreclosure.
- Auction: once the foreclosure is concluded and the owner’s delinquency is proven in court, the bank will try to recuperate the owed amount by listing the property at a public auction.
- REO: if the property is not sold at the auction, it will be added to the bank’s inventory and will be classed as a bank-owned or REO property. From there, the bank will collaborate with REO specialists and real estate agents to sell the property.
Buying an REO Property
Broadly speaking, buying an REO property is similar to buying a home from a private owner. You will still need to check MLS listings, research the local market, consider your financing options, obtain an appraisal and inspection, make an offer, negotiate and close the deal. However, there are some differences.
With REO, you’re dealing with an institution
This means that making decisions and waiting for a reply will take longer than when buying from a private owner and even cause delays that come with hidden costs.
For example, banks often require you to sign an addendum to the contract, in which they stipulate clear terms for the purchase, such as the fact that the property will be sold as-is. Yet, the addendum can also specify that the sale must be closed by a set date. If the sale is not closed by then, you can find yourself paying a fee. The best way to avoid this scenario is to get pre-approved with the lender selling that property.
Negotiating the price will be trickier
Banks often sell REOs at discounted prices and are less inclined to lower the price. Even if your offer is taken into consideration, it can go through a lengthy approval process.
Most banks will clear any liens on the REO property
In addition, they’ll also provide you with a general warranty deed pledging that you will own the home free of any legal issues or claims, such as outstanding liens. However, in some cases, banks will only provide a special warranty deed, which means they can’t guarantee against any liens prior to the bank owning the property. Ideally, you should hire a company to run a full title search before closing to avoid unpleasant surprises.
Are REOs Worth It?
The main appeal of real estate-owned properties is that they can be a better deal than buying from a private owner. When a property fails to sell at an auction, the bank is at a disadvantage, and in order to recover its costs, it will aim to encourage buyers by offering discounted prices.
Buying an REO is also less risky than buying a home at a foreclosure auction. For example, you can visit the property and get a better idea of the condition it’s in. You can also request a home inspection, which is rarely an option for auctioned properties, or when it is, it comes with strict limitations.
On the flip side, the main drawback to an REO property is the fact that it’s sold as-is, which often means it will need extensive repairs. Admittedly, it’s in the bank’s interest to sell the property, and some banks will make repairs to ensure that the property is livable. But this isn’t always the case. Also, the bank will not pay for any repairs on REO properties that you wish to do yourself, so remember to factor in this extra cost.
If you’re considering buying a bank-owned property, it’s always best to work with a real estate agent who has experience with REOs. Not only will they help you find the best properties and best prices, but they will also advise on how to structure an offer, help calculate the cost of repairs and streamline the process of buying an REO as much as possible.