An REO property is one that's been foreclosed on and is now owned by the bank.
REO properties fall into two categories:
Move-in condition: The home is in acceptable condition and not in need of rehabilitation. You could buy this property and move in quickly.
Damaged: 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.
Where can you find REOs for sale?
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:
- Often, you'll pay a below-market price for the property.
- The process is similar to a "normal" home purchase in that you can secure financing using a traditional mortgage. (Buying an REO property is nothing like buying a foreclosure property at auction with cash.)
- You'll be able to do inspections, purchase title insurance and secure financing before completing the purchase.
Cons of buying REOs:
- Many banks will require an "as-is" purchase, and if there are problems or necessary repairs, paying for them is your responsibility.
- Banks rarely accept anything less than the asking price. They've already done a lot of research to come to a price that makes sense for them. (Keep in mind that if most sales in your market are selling above asking price anyway, this point isn't necessarily a con for buying an REO property.)
- The process can take longer than a regular home sale.
REOs vs. Short Sales: What's the Difference?
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.
RE/MAX Buyer Tip
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.
For more detailed information about what's involved in a short sale, read the Tips on Short Sales.
Finding the Best Agent
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:
- What kind of training or education have you had in REOs and foreclosures?
- How many REO properties have you successfully helped clients purchase?
- Were the REO properties you've helped clients buy in the local area?
In addition, the same tips apply here for choosing a real estate agent as those outlined in the Tips on Choosing and Working with a REALTOR®
Do not venture into REO territory alone. Many RE/MAX agents are thoroughly trained in REOs and have a solid reputation for success. Choose your agent wisely.
5 Buyer Mistakes to Avoid
Increase your chances of a successful REO purchase by avoiding these mistakes:
- Hiring an inexperienced agent: 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.
- Not knowing the law: 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.
- Aiming too low: 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.
- Considering price only: 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.
- Thinking short-term: 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.
RE/MAX Buyer Tip
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.