What is Real Estate Owned (REO)?
A real estate owned or REO is a property that a lender owns due to a foreclosure. The lender is typically a bank or government-sponsored entity like Fannie Mae or Freddie Mac. When a borrower fails to make a payment, the home will go into foreclosure, and the lender will regain ownership.
The lender will then attempt to sell it to the highest bidder at auction. If no one purchases the property at auction, it will stay on the lender's books as an REO until they find a buyer. Although not always the best properties on the market, REOs can offer investors interesting opportunities. So, you may want to look into buying REOs if you're looking for a good deal.
How Do Real Estate Owned (REO) Properties Work?
REO properties are officially owned by the bank, which means you will have to strike a deal directly with the lender, not the homeowner. By this point, the homeowner has already gone through foreclosure and is no longer in the picture. In addition, REOs are typically sold "as-is," which means they will not be willing to negotiate any upgrades or repairs.
But they are often sold at a rock bottom price because the lender will be desperate to get it off their books. Chances are that if it didn't sell at auction, the property isn't in excellent condition because good deals tend to go fast. But, it's possible to find a diamond in the rough by buying an REO if you're willing to do some research.
REO Specialists
REO specialists are employees of the lender who owns the properties. REO specialists manage the lender's REO inventory and field any offers. They are responsible for marketing the properties, responding to requests, preparing reports, and completing other tasks related to managing and selling the REOs.
REO Properties and Real Estate Agents
You can find real estate owned properties through a realtor. Many REO specialists will work with local real estate agents to help market some of their inventory to the agent's clients and investors. If you want to purchase REO properties, you should start by contacting the REO specialist at your local bank, but you can also find an investor-friendly real estate agent.
Advantages of REO Properties
- Low Price
- No Outstanding Taxes
- Negotiating With Motivated Banks
1. Low Price
REO properties are often sold at a rock-bottom price. The lender has already assumed they will not make their money back and will be willing to sell the home for whatever they can. So, if you're looking for a home being offered at a rock-bottom price, REOs are the way to go.
2. No Outstanding Taxes
One of the benefits of buying REO properties is that you can be reasonably confident that there are no outstanding tax liens. If you purchase a property in foreclosure, you have no idea what liens are on the title. Or, if you buy a tax foreclosure, you're typically on the hook to pay the overdue tax balance. Although you should still check with the lender and do a title search, REO properties are generally free of tax liabilities.
3. Negotiating With Motivated Banks
Banks are highly motivated to sell REO properties. Lenders aren't in the business of rehabbing or renting out the homes, so there is no way for them to make money from REOs unless they sell them to an investor. Therefore, they will likely be willing to accept an offer that will allow you to flip the home and double your money.
Disadvantages of REO Properties
- Sold As-Is
- Can Require Expensive Repairs
- May Be Occupied
1. Sold As-Is
REO properties are sold "as-is," which means it doesn't have to pass an inspection or be in habitable condition. So when you buy an REO property, you agree to purchase the property and whatever comes with it – which could mean a leaky roof, termites, mold, or anything else. But that's also why they're sold at such a discount.
2. Can Require Expensive Repairs
While the REO may be in decent condition, chances are it will need serious renovation. Foreclosed properties that are in proper condition typically sell quickly at auction. In most cases, if it doesn't sell quickly, it's likely because it requires expensive repairs to be profitable. So be prepared to do some work if you purchase REOs.
3. May Be Occupied
If you plan on buying a multifamily REO, there's a chance that the building may still be occupied. Lenders are required to give tenants specific notice to vacate before they can be evicted, typically 90 days. So, if the bank just recently repossessed the property, you must honor any current lease agreements.
What Is REO Occupied?
REO Bottom Line
REO properties can present exciting opportunities, but they also come with certain risks. It's tough to know an REO property's condition beforehand, and banks may not even let you view it prior to sale. So be prepared to invest time and money into renovation if you want to profit from the investment.