Real Estate Owned (REO) Properties: A Complete Guide
The process of buying a home is exciting, but it can also be very expensive. Thankfully, plenty of nontraditional listing options are available for home buyers, and these options won’t break the bank. One option that interested buyers might consider is a real estate owned (REO) property.
Let’s take a close-up look at what REO properties are and how to go about buying one.
REO Property Meaning
Real estate owned (REO) properties are homes that have fallen under the ownership of a mortgage lender or investor, typically because the property failed to sell at auction. Homes can become REO properties for multiple reasons, the most common one being that the home went into foreclosure.
The foreclosure process is very costly and can involve attorney fees as well as the cost of seizing and securing the property. If the lender that took possession of the home can’t sell the property at an auction, the lender assumes ownership of the home and tries to sell the real estate owned property as quickly as possible.
Do All REO Properties Result From Foreclosure?
Although REO properties arise out of the foreclosure process – when a homeowner is unable to make their mortgage payments or pay property taxes – the terms “REO” and “foreclosure” aren’t synonymous.
Beyond a foreclosure, REO status might also result from a home going back to the lender after the previous owner moved out or passed away at the end of a reverse mortgage. If the heirs are unwilling to pay off the mortgage balance, refinance the home or sell the home, they have the option to return the property to the lender or investor.
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Pros And Cons Of REO Properties
Several benefits and drawbacks of buying an REO property are worthy of attention, and we’ll review them next.
REO Property Pros
To provide a better idea of whether buying an REO property is right for you, here are a few advantages that come with purchasing this type of property:
- No liens or claims on the home
- Homes selling at a discounted price
- Lenders and banks being motivated to sell the property
REO Property Cons
Although the low price point of an REO property can be appealing for home buyers, this type of home usually needs repairs. Other disadvantages of buying an REO property include:
- Potential hidden costs
- The likelihood of the property being sold as-is
- More competition due to the lower price point
How To Buy An REO Property
If you’re looking to buy an REO home, it’s important to understand the process from start to finish. Take the following steps to ensure you know how to find an REO property, how much you can afford and everything else that goes into buying one.
1. Get A Real Estate Agent With REO Experience
When you’re looking at foreclosures and other investor-owned properties, it’s helpful to work with a real estate agent who’s familiar with the REO market. That’s because these properties come with certain peculiarities. Here’s what you can expect from an experienced REO listing agent:
- They’ll know how to structure an offer that looks most pleasing to a lender or investor.
- They’ll know what they expect to see in the offer and, just as importantly, what they don’t.
- They’ll probably have some experience in telling home buyers how to go about making the house livable.
2. Find REO Property Listings
A good place to start when looking for an REO property is to search publicly available listings from the Department of Housing and Urban Development (HUD) and other federal agencies, including the Department of Veterans Affairs, the Department of Agriculture and the IRS. In addition to the listings of the federal government, you can search listings from Fannie Mae and Freddie Mac.
Some large banks may prefer to make a loan and hold onto it for 15 or 30 years rather than selling it to mortgage investors and including it in a mortgage-backed security (MBS). In these cases, the banks may have their own online listings where you can search for REO properties they’ve repossessed.
3. Understand General Vs. Special Warranty Deeds
Most home sales involve what’s known as a general warranty deed, which tells you a couple of things:
- The seller has the right to sell you the property as they currently own it.
- No one besides the seller has any legal issues or claims to the property.
If you get a general warranty deed, no one can claim issues with your title from before you owned the property. The general warranty deed also lets you know there are no liens and that the property is owned free and clear by the seller.
However, with an REO sale, you may not be able to get a general warranty deed. In this situation, it’s common to instead receive a special warranty deed. “Special,” in this instance, doesn’t always mean “better.”
With a special warranty deed, the mortgage investor is likely to only guarantee that no additional title issues have arisen since they took over the ownership. Although they have the right to sell the property, the mortgage investor can’t guarantee the absence of other pre-existing title issues or liens.
For this reason, it’s important to take precautions when purchasing any REO property.
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4. Consider An Owner’s Title Policy
One precautionary measure you might consider with an REO property is buying an owner’s title policy. You’re required to get a lender’s title policy, which protects the lender’s investment in the event of another ownership claim against a borrower’s home. But taking the extra step to get an owner’s title policy protects your investment against any pre-existing claims on the property.
The owner’s title policy could be helpful when buying an REO property, as many of the available properties have foreclosed. This means previous owners probably were in financial trouble and you may have to worry about tax liens or judgments on the property.
That’s why it’s important to have a title company perform a title search to prevent any surprises before buying an REO property.
5. Make A Strong Offer
Since they hope to get the listing off their books as soon as possible, the lender or investor selling the REO property will want to feel confident the deal is going to go through right away.
To make your offer stand out, we recommend coupling it with a strong mortgage pre-approval.
6. Get A Home Inspection
A home inspection is key when buying an REO property. Although the lender or investor is unlikely to fix any problems that come out of the inspection, it’s still important to get one done.
With a home inspection, you’ll find out anything that’s wrong with the house before you move into it, and you’ll have a better sense of the questions to ask the seller before completing the transaction.
If there are any absolute deal-breakers involving repairs, you’ll be able to walk away before purchasing and only lose your deposit. If you and your real estate agent can convince the investor to agree to an inspection contingency, you might be able to have your deposit refunded.
The Bottom Line
REO properties can be a great option for home buyers with a lower budget and a willingness to make a few repairs. It’s important for any interested buyer to thoroughly research bank-owned properties and consult experts before making a purchase. Above all, you need to ensure that you’re making the best decision for your needs.
