REO stands for “real estate owned” and refers to foreclosed houses that have not yet sold at the customary foreclosure sale. REO homes are sold “as is,” and tend to be at a high discount. However, some REO houses require so much work they are no longer a good investment.
The real estate world has a variety of ways to buy a house, and even more terms you can use to narrow down the type of home you want. One of the more popular options is an “REO” home. REO properties are affordable and sometimes in good shape. However, other properties require extensive repairs that make the overall investment costly.
So, what exactly is an REO property? You may have heard house flippers talk about REO homes that they managed to purchase for a great deal. But is this always the case? And how great is the deal if the repairs cost so much? In this article, we discuss how a home becomes real estate-owned, if REO homes are worth the time and money, and why buyers should care. Keep reading, you may just find a way to get the house of your dreams.
What is a real estate-owned (REO) property?
Are REO properties a good deal?
Many REO properties are great deals, especially in areas where you couldn’t afford a home otherwise. However, consider each home on a “per case” basis. Some REO properties aren’t worth the land they’re on!
Who takes ownership of the REO property?
The bank or lending investors own the REO property until someone purchases it. Obviously, the number of real estate owned (a.k.a lender-owned) properties tends to increase during periods of financial instability, such as recessions.
Can you buy REO directly from a bank?
Yes! Because the bank (or lending investors) owns the property, you can speak directly to the bank about purchasing the property. This usually happens through the REO specialist. You can also buy the home directly from the bank even if the property is listed elsewhere.
What is the difference between REO and foreclosure?
Foreclosure is a process where a home is sold by the original lender because the homeowner did not make home loan payments. A foreclosed home is therefore a home that was sold through the foreclosure process. An REO home, on the other hand, is a property that went through the foreclosure process but a buyer hasn’t been found yet and the property is now owned by the lender.
What should I do before buying an REO home?
Real estate-owned properties are not like other properties. Many people shy away from these homes because of the complicated purchase experience, but it can be rewarding for others. If you’re looking to purchase an REO home, first follow these steps:
- Speak with a bank’s REO specialist. Most banks list REO properties on their websites, which REO specialists manage. If you want to learn more about the property or prepare an offer, speak with the REO specialist.
- Get pre-approved for a home loan. Even though lenders offer REO properties at a low price, we recommend finding the ideal mortgage before making an offer. Several government programs offer REO home loans to make home-buying more accessible. If you’re struggling to find the right home loan, use SuperMoney’s reviews and comparisons to make the search easy.
- Ask for a home inspection. While the lender probably won’t fix any damage listed, a home inspection offers a list of repairs the property needs. Since you will be responsible for repairs, you’ll want to know how much work the home needs before purchasing. Even if offered at a great price, the home repairs may cost more than the home is worth.
If you want to get an REO property, find an REO specialist. This is a person who understands the laws behind REO properties and can explain how to make the right impression on lenders. They may also help you gauge how much of a risk the home in question is.
How does a house become an REO property?
Becoming an REO property is not always easy, and it’s generally a “last of the last” resort. Here’s how a property becomes an REO home:
- The original homeowner defaults on the loan. If the original homeowner doesn’t pay the home’s mortgage, the property then enters pre-foreclosure. The borrower may try to get a short sale or give the house keys back before foreclosure. Ultimately, the lenders foreclose on the property, which kicks off a big legal process.
- The house goes into foreclosure. During a foreclosure sale, the home is put up for sale at an auction. If no buyer is found, the lenders become owners and managers of the property. Anyone who lives inside is evicted.
- Any homes that remain unsold become REO. Once no one purchases the property, the home becomes REO. Since maintaining the property is expensive and banks want these homes off the market, the price is slashed and offered to potential buyers as-is.
REO properties and real estate agents
In addition to listing REO properties on bank websites, REO specialists hire local real estate agents to promote the property online. If you’re looking for an REO home, check with your local agent to see if any properties fit this description. Several major sites, such as Zillow and Realtor.com, also have filters on their websites dedicated to REO properties.
Once you find a property, contact the listing agent and ask for a buying agent reference.
What are the pros and cons of REO properties?
REO properties come with tons of perks that make them a good purchase. However, these properties can also be incredibly risky if you don’t know what you’re doing. Here’s why.
Here is a list of the benefits and drawbacks to consider.
- Significantly lower price compared to most homes
- Clear of taxes since the bank regained the property
- Not a tax foreclosure, so you don’t have to cover the tax bill
- Could get an even better price by negotiating with the banks
- Sold ‘as-is’ even if you get a home inspection
- May need expensive repairs, especially since uninhabited homes can become REO offerings
- For multifamily homes, the property may be occupied, known as “REO occupied”
- Tenants have the right to stay at the property, so legal action could be necessary
How can I buy an REO home as a real estate investment?
Do you want to fix and flip a home? Maybe fix it up and rent it out? REO properties are great for this. Here’s how you can do it.
- Get approved for a mortgage loan geared towards REO properties with repair costs. You can talk to a mortgage loan officer about this. We encourage you to read our home buying guide to better prepare for this process. If you want multiple properties, get a blanket mortgage.
- Search REO properties in the area you want. You can look at listing sites, bank websites, or ask an REO specialist what he or she recommends.
- Get an inspection of every home you tour. If you like a property enough to tour it, get an inspection. This allows you to estimate the property’s repairs and add that cost to your budget. This will help you determine if the investment is worthwhile.
- Buy the home. If you think the property is worth the money and repairs, get your funds and paperwork in order. Your real estate agent will help you out here.
- Start repairing, upgrading, and renting out your home. Of course, if you don’t want to rent out the home, you can always flip it. Multi-unit homes are excellent for families that want to live in one unit but earn an income by renting out the other.
- REO properties are foreclosed homes that never sold at an auction.
- Since they weren’t sold at auction, REO properties are the real estate “leftovers.”
- REO real estate will have no tax liens on them and are offered at a discount.
- Because the homes are sold as-is, always have a home inspection and repair estimate before you buy an REO property.
Find the Right Financing
Does an REO home sound like the deal for you? Before you start looking for homes, you need the right financing. To get started, we strongly suggest you read up on how to finance a house sold directly by a bank. After all, knowledge is power.
- How to Buy a House at Auction: A Step-by-Step Guide — SuperMoney
- The Ultimate Guide To Buying A New Home — SuperMoney
- Best Mortgage Lenders | February 2022 — SuperMoney
- HUD Homes (REO) — U.S. Department of Housing and Urban Development
- REO and Foreclosure Properties — USDA.gov
- Real Estate Owned (REO) — Federal Housing Finance Agency