Real estate owned properties, or REO properties, are houses that have been seized by banks or other lenders from people who are unable to pay their mortgages. When lenders offer mortgage loans, they see them as an investment, because they will earn money from the interest on the loan. So to salvage their investment, banks foreclose on homes with unpaid mortgages and sell the properties at foreclosure auctions. If a home doesn’t sell at auction, it becomes an REO property.
Why foreclosure auctions don’t always work
Many foreclosure auctions fail to bring in any bids. Banks or other mortgage lenders do not set foreclosure prices according to the home’s market value. The lenders try to cover their losses and fees. The foreclosure minimum bid price usually includes the balance of the unpaid mortgage loan, interest owed, attorney’s fees, and costs generated by the foreclosure process. Especially in a soft real estate market, the asking price could tower above market value. Hence, a bank can easily end up with a real estate owned property that they still need to sell.
When foreclosures become REO properties
Once a property becomes an REO, the lender will prepare the house for sale, including removing the occupants, clearing liens on the property, and determining a price. Generally, lenders do not do any upgrades or repair work on REO listings, which are sold “as is.”
When the home is ready for sale, the lender will work with a broker to put the real estate owned property on the market.
Finding an REO listing
Typically, even if the lender has an excess inventory of REO property, it will not offer a house at an unbelievably low price. In most cases, the lender and the broker have researched market fluctuations and recent comparable sales to determine a fair price. As with any property, you might find a great deal, but don’t expect REOs to be severely undervalued.
To find real estate owned properties, you may have luck contacting lenders directly. Some lenders may be willing to provide you with a list of their REO properties available for sale. However, working with a real estate agent is an easier, and often more reliable, way to find REO listings. The agent will be able to find several options in your area from more than one lender, and help guide you on the right price.
Making an offer on a real estate owned home
Buying an REO is a complex process. You will have to be a savvy negotiator to purchase the home at a price you want.
An offer on an REO listing should include a cover letter, stated willingness to buy the home “as is,” and an escape clause that lets you out of the deal if later inspection reveals extensive property damage. You usually won’t be able to inspect the REO before you send your offer. “However there have been times when we have been able to get some repairs and concessions done during our negotiations but this is ordinarily not the case.”
All homes in Arizona and some other states, are currently sold “as is” under the updated purchase contract of 2017. This does not mean you cannot ask for repairs, only that there are not required items or warrantied items that must be fixed as in the past Arizona purchase contract.
To increase your chances of landing the REO, make your offer for or close to the asking price. However, if your research reveals the house is overpriced, you might decide to offer below asking price and explain your reasoning in a cover letter.
When you buy an REO, you can end up buying a good home at a good value. Given the level of complication, however, you will benefit from hiring a team of experts, such as a real estate agent, title and escrow, and contractor, to help you navigate the deal.
Updated from an earlier version by Gilan Gertz
Jan 22, 2015 | Angela Colley writes about real estate and all things renting and moving for realtor.com. Her work has appeared in outlets including TheStreet, MSN, and Yahoo. Follow @angelancolley
Christopher Mincolla with the Mincolla Group – Real Estate Professionals at West USA Realty
Call: (480) 788-8569