REO Properties: How To Find and Buy Bank-Owned Properties

There are multiple types of distressed properties that investors can look for. As you start your investment search, you may come across REOs, otherwise known as real estate-owned properties. REO properties are homes that have gone through the foreclosure process but did not sell at auction. This means they are now owned by the lender – usually a bank or credit union. 

REOs provide opportunities for buyers to purchase properties below market value. You could get a good deal on a house without having to attend foreclosure auctions. However, these houses also come with risks. Buyers need to be careful when navigating the purchase process to protect their finances. 

Use this guide to learn more about REO properties, including how to successfully buy one. Grow your investment knowledge so you can move forward with confidence.

What Are REO Properties?

To understand REO properties, it helps to take a step back and look at the whole foreclosure process. When a homeowner stops making mortgage payments, the lender will issue a warning and put the property in pre-foreclosure. If the homeowner continues to neglect the payments, the lender can seize the property as collateral, putting it in foreclosure. The owner will be evicted and the lender will try to sell the house to reclaim the money lost from the loan. 

One of the most common ways to sell foreclosed properties is through an auction, where investors often purchase properties without inspecting – or even touring – them first. However, if the house does not sell at auction, the bank still owns it. This is when it becomes an REO, or real estate-owned property. 

Banks want to sell REO properties as quickly as possible to recoup their losses, which means they often list them at reduced prices. This is good news for buyers and investors who want to procure houses for less than their market value. They might be able to turn to REOs to get good deals.

How Are REO Properties Different From Foreclosures?

An REO property has already been through the foreclosure process. It is the next step after foreclosure if no one buys the house at auction. There are also differences in the sale process. 

Foreclosure auctions are public, competitive bidding events where buyers must have cash on hand. Buyers are limited in the amount of information they have about a property and cannot inspect it before buying. Foreclosure auctions are often popular with cash-buying investors who can afford to purchase properties immediately regardless of their condition. 

More cautious buyers might prefer to look into real estate-owned properties instead. These houses are listed like regular homes, which makes them more accessible to traditional buyers. You may be able to get a loan for the property and have a traditional closing period. A buyer of an REO property can still get an inspection and an independent appraisal before moving forward with the purchase process. 

There’s an additional benefit to considering a bank-owned property over a foreclosed house: the mortgage lender clears the title before selling the property. This means you don’t have to worry about any liens, unpaid taxes, or ownership claims. While you will still get title insurance on the home, you can rest assured knowing there aren’t any outstanding claims on the deed.

REOs are Usually Not Sold Through Real Estate Agents

One more thing to keep in mind as you navigate the REO process is that these properties are usually managed by the bank or mortgage company. They are usually not represented by real estate agents. While you can – and should – hire a Realtor to purchase an REO, know that your agent will be working directly with the seller. 

This fact can affect agent commissions. The bank or lender usually decides what payment your Realtor will receive for the sale of the property. However, following the lawsuit with the National Association of Realtors (NAR), your Realtor may want to discuss payment before starting the REO search. This helps them understand what they are likely to receive from your purchase of the house.  

Pros and Cons of Buying REO Properties

There are several advantages and disadvantages to considering this form of investment. Here are a few benefits and drawbacks so you have a clear picture of the REO environment. 

Pros

• You can buy homes at discounted prices: Banks may sell properties below their expected value to offload them quickly. This could be a good opportunity to enter the investment market or secure a home affordably. 
• The home comes with a clear title: The lender typically clears any liens or unpaid taxes before selling. This can give you peace of mind. 
• There are opportunities for negotiation: You may have room to negotiate the price or request repairs from the bank during the bidding and inspection process. This isn’t an option at a foreclosure option. 

Cons

• You are likely buying the house “as-is”: Properties are often sold in their current condition, which may require repairs. Few banks want to spend money to make repairs and improve the value of the home. 
• There is strong competition: Investors and buyers often compete for REO deals, driving up prices. It may be hard to snap up an REO property if there are a lot of investors in your market. 
• You get limited information on the home: Banks may not have detailed knowledge about the property’s condition or history. You are reliant on the information from the inspection. 

The ease of buying a bank-owned property depends on the current market in your area. There might be ample homes where you can negotiate with the bank and take your time on the inspection process, or other investors could fight for these homes and accept them in distressed condition. Be sure to conduct local market research to better understand your area.

How To Find Real Estate Owned Properties for Sale

If you feel like buying an REO property is a good fit for your investment needs, you can move forward with your search to find these houses. Here are a few steps for anyone interested in bank-owned properties. 

• Work with a real estate agent experienced in REOs: One of the benefits of buying an REO property instead of attending a foreclosure auction is that you can be represented by an agent. However, you still need to find a Realtor who has experience with REO. Even if you feel confident in navigating the purchase process, some REOs are listed on the MLS (Multiple Listing Service and hiring a Realtor will give you access to that data.
• Check local bank and lender websites: It’s easier than ever to find REOs through the lenders who are trying to sell them. Many banks, such as Wells Fargo, Bank of America, and Chase, have dedicated real estate websites for REO listings. You can also check your local banks and credit unions. 
• Browse government websites: You can also look at government agencies to see if they have any REOs. A few places to look include The HUD Home Store, Fannie Mae’s HomePath, and Freddie Mac’s HomeSteps.
• Use real estate marketplaces: platforms like Zillow, Realtor.com, and Foreclosure.com also list REO properties for sale. These websites should also have photos that alert you to properties that need extensive repairs. 

You might use a variety of these steps during your search for bank-owned homes. You and your Realtor can check various sources until you find a few target properties you are interested in.

Steps To Buy a Real Estate Owned Property

Once you know where to find REOs, you can start the process of purchasing one. Here are five detailed steps to find bank-owned houses in your desired area.

1. Get Pre-Approved for a Mortgage

The process starts just like any home purchase. You need to work with a lender to prove that you can afford to buy a house and make monthly payments on the loan. Start meeting with lenders to secure a pre-approval letter and explain your intent to purchase an REO. Securing pre-approval can increase your chances that your bid is accepted while streamlining the closing process. 

While it’s possible to secure financing for an REO, some sellers may prefer cash buyers for a quicker sale. Buying an REO could take time if you live in a competitive area with several cash-buying investors.

During the pre-approval process, you may want to consider how much you have saved for repairs (or how much you can afford each month in repairs). REOs are often distressed and might not be move-in ready. You may need to make immediate, potentially expensive, repairs so the property is habitable again.

2. Research the Property

Start researching REOs in your area that fall within your budget and meet your repair capabilities. Consider how the house is being sold to comparable properties in better condition. This process can help you set short-term goals for securing an REO and long-term goals for either selling it after the repairs are complete, living in it, or renting it out. 

You can order a home inspection for potential properties to better understand their condition. Although REOs are sold as-is, an inspection helps identify potential repair costs. This way you have a clearer picture of your repair needs and can budget accurately as you move forward. 

You can also independently research a property’s history to discover potential clues as to why it was reclaimed by the bank. During this process, research the neighborhood if you aren’t familiar with it to learn more about the community.

3. Make an Offer

Once you are ready, you can make an offer on the REO. Even though this is considered an affordable option to buy a house, you will still need to submit a competitive bid that will stand out against other buyers. Another investor could take your house if their offer is more competitive. The bank also has a clear idea of how much it needs to recoup its losses, which means it likely won’t be receptive to lowball offers.

Banks often sell properties without contingencies, so buyers should be prepared to act quickly. You will want to work closely with your lender to clear the underwriting process and have a plan for when you take over the house.

4. Negotiate Repairs or Credits

While REOs are sold as-is, buyers can request repairs or credits for significant issues discovered during the inspection. During this time, you can also secure an appraisal to evaluate what the home is worth. If there are enough issues – or one serious issue – that significantly devalue the home, you will have more negotiating power. 

Once again, this is where the local market will affect how much you can negotiate. If other investors are fine accepting the house as-is, then the bank can ignore your request. They can consider accepting another bid from a less demanding buyer. However, if a house has remained untouched, you will have more flexibility in the credits you request.

5. Close the Deal

Once your loan is approved and you have proof of a clear title, you can move forward with the closing appointment. Your real estate agent, lender, and title company should be able to handle most of the work. You will be cleared to close, just like any other property, and can take possession as the official property owner.

Find a Real Estate Agent to Secure Your REO Property

Purchasing a real estate-owned house can be a great investment opportunity or a way to break into a competitive market. While bank-owned homes are often distressed, some can be found in desirable neighborhoods or get overlooked in hot markets. You might be able to snag a deal and start the fixer-upper process if you know what to look for.  

To start your search for a bank-owned home, hire a Realtor through FastExpert. You can find agents who have experience in REOs and know how to navigate their purchase process. Your real estate partner will help you overcome hurdles and find an investment you are proud of. Visit FastExpert today and meet the leading real estate professionals in your area.