The most common type of foreclosure property you'll encounter in your home search is a Real Estate Owned, or REO, property. REOs are properties that have been foreclosed and are now owned by the bank.
REOs may be vacant or in need of repair. But often they look and feel just like other homes for sale, and they're listed by a real estate agent. Although they're typically sold as-is, it's not uncommon for an REO to be in move-in condition. But the process of buying an REO is different than other home purchases.
With the help of a qualified real estate agent who knows the terrain of the REO market, your REO transaction will run more smoothly – and you'll likely get a great deal in the process.
Working with an agent experienced in REO transactions will make the difference between a successful purchase and a frustrating, confusing experience.
An REO property is one that's been foreclosed on and is now owned by the bank.
REO properties fall into two categories:
The home is in acceptable condition and not in need of rehabilitation. You could buy this property and move in quickly.
A damaged REO generally needs repairs and rehabilitation before you can move in. These types of REOs are attractive to investors and some buyers who aren't daunted by the work involved in rehabbing a property. Often, you will get a bigger discount on damaged REO properties, but you have to consider refurbishing costs.
Banks are eager to sell and get these properties off their books. In most cases, they'll enlist an agent to clean up the property and list it for sale in the MLS, which means you'll find these properties listed alongside homes in the neighborhood that are being sold traditionally.
If you're looking to buy an REO, it's important to work with an agent who has experience with foreclosures. Many times the bank will insist on an "as-is" sale, and an experienced agent can help you work through your decision whether to move forward with the purchase based on the property's refurbishing needs.
Pros of buying REOs:
Cons of buying REOs:
Foreclosure proceedings and laws vary by state. Never make assumptions. Work with an agent who understands REOs and can explain the process in the state where the property is located.
Here's something you might be wondering: What's the difference between an REO property and a short sale?
An REO property is one that has already gone through foreclosure and is currently owned by the bank, which is trying to sell it to a buyer.
A short sale is a real estate transaction that takes place when an owner owes more on the mortgage than the house is currently worth and the bank agrees to a sale for less than the full mortgage balance in order to avoid foreclosure. A property involved in a short sale is not bank owned.
The number of short sale transactions has increased in recent years, and you're likely to run into homes like this on the market as you view properties. As with REOs, short sales can be complicated, so it's extremely important to find a real estate agent who is experienced and specifically trained.
Despite what you may hear on TV, buying foreclosures is not a get-rich-quick scenario. REOs can offer a way to buy property at below-market prices, but the process is different than an average home sale. Having a solid agent who is trained and educated in local REO transactions is the best approach for success.
Working with a real estate agent who is educated and experienced in REO transactions is an important step toward a successful purchase.
Ask any agent you're thinking of working with the following questions:
Get preapproved for a mortgage. This is a good idea whether you intend to buy an REO or a traditional property. Not only will preapproval help you set your price range, but it will also help speed up the closing process after your offer is accepted.
Increase your chances of a successful REO purchase by avoiding these mistakes:
Work with a Realtor who is well versed in foreclosures in the area you're searching. Look for someone with advanced training and a great deal of experience in distressed properties.
Foreclosure laws vary by state. What your neighbor’s cousin did in Florida won't necessarily play the same in California. Consult a Realtor familiar with your state’s laws who has facilitated REO purchases in your area in particular.
It's true that banks want foreclosures off their books, but that doesn't mean they'll accept a lowball offer. When making an offer, your agent should justify it with comparable data. An extremely low offer can derail negotiations. An experienced agent can coach you through the offer process.
There's more to an REO property than price. Some properties have extreme damage, and the cost of repairs could easily eat up any discount you're getting. Have the property inspected and see it for yourself. Objectively assess its value based on physical condition, location and your ability to improve the property.
Understand local market conditions – your agent can explain them in detail – before jumping in. Consider not just what’s happening now, but also where the market may be headed as you define your goals for your REO purchase. It's common to buy an REO to live in long-term, or to keep as an investment property for rent.