Beginner’s guide to REO properties

Real estate owned properties, also known as bank-owned homes, are properties that have fallen under the ownership of a lender or investor after going through the foreclosure process.

After a homeowner defaults on their mortgage, the pre-foreclosure period typically involves a public auction in which the minimum bid equals the outstanding loan amount (including accrued interest and any fees associated with the sale). If the property doesn’t sell in this auction, the foreclosed home will automatically become an REO property. Then, the lender—typically a bank or creditor—will attempt to sell the property on their own.

REO properties can be an attractive option for home buyers on a budget for a number of reasons, but they also have downsides to consider.

Advantages of REO properties

• Banks and lenders tend to discount the prices of REO houses in order to entice more potential buyers. 

• Once a property becomes REO, the lender will typically wipe out any liens (a form of security interest) and other outstanding claims against the home. This eliminates many potential legal issues that would prevent a prospective buyer from taking full ownership of the property, and can also save buyers lots of money in the long run. 

Disadvantages of REO properties

• REOs are usually sold “as is,” which means that the lender won’t make any repairs before you purchase the property.

• Because REO properties are often sold in disrepair, buyers should be prepared to make—and pay for—any necessary renovations to the home.

These five steps are crucial when buying a bank-owned home.

1. Search for REO homes for sale

This entails a little more effort than browsing local real estate listings. You can search for foreclosed properties for sale using federal agencies like the Department of Housing and Urban Development (HUD), as well as online databases such as the multiple listing service (MLS) or Zillow. Lender-specific listings such as PennyMac REO listings also show bank-owned properties on the housing market. 

2. Get pre-approved for a mortgage

Once you find a property of interest, try to get pre-approved for a mortgage by the lender that owns the home. Confirmation that you’re financially able to purchase the property can make the lender more likely to accept your offer on the home.

3. Find a real estate agent with REO experience

When you’re looking into buying a bank-owned property, it can be extremely helpful to work with a real estate agent with REO experience since certain aspects of the home-buying process are slightly different when purchasing a bank-owned home. 

For example, buyers typically receive a general warranty deed, which states that the current owner has the right to sell the property and that there are no liens or outstanding taxes associated with the home. However, REO homes are often sold with a special warranty deed, which only guarantees the absence of title issues since the current lender took ownership of the home. In this case, home buyers would need to purchase a separate owner’s title insurance policy in addition to a lender’s policy on the home. 

A real estate agent who is familiar with the REO market can help you navigate these specialized details. In addition, they can help you structure an offer and guide you through other important tasks, such as hiring a professional to run a home inspection, which is crucial when it comes to buying an REO property.

4. Get a property inspection and appraisal

Although the lender is unlikely to fix any problems that come out of your property inspection, this step is still imperative to the REO home-buying process, as it will help you identify any necessary repairs the home will need. If you come across any major deal-breakers regarding the property’s condition, you’ll be able to back out of the deal before the sale is completed, losing only your deposit. 

It’s also wise to get an appraisal on your desired REO property. This way, you can compare the home’s value to its asking price—and possibly negotiate the amount down further.

5. Negotiate your offer

Bidding on an REO property is slightly different than bidding on a privately owned home. Dealing with a lender means you won’t have to worry about a homeowner’s attachments to the property influencing their willingness to negotiate. However, banks usually take longer to respond because an offer must be reviewed by several shareholders or companies. Banks are also more likely to present a counter-offer because they need to demonstrate to investors that they tried to get the best possible price for the property. 

Note that potential buyers who make offers on homes that have been on the market for longer than 30 days tend to have greater negotiating power. (Many banks won’t stray far from the original asking price if the listing is relatively new to the market.) Once you reach an agreement with the seller, the final step to closing on the property is making sure your down payment and home loans are in place.

Home buyers and real estate investors who are willing to take a little extra time and renovate extensively may find the REO purchasing process to be worth the additional steps. But as always, it’s important to do your research and consult with experts to make sure this is the right route for you.

Bungalow is the best way to invest and manage your real estate portfolio. We work with you to identify, purchase, fill, and manage residential properties—so that you can enjoy up to 20% more in rental income with a lot less stress. Learn more about Bungalow.