Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
If you’re in the market for a new home, you may have come across a few real-estate owned (REO) property listings. These types of properties can be a steal, often selling for below market value. However, there are some risks involved that you should know before considering an REO property.
What Are REO Properties?
Real estate-owned property—also called bank-owned property—is when a lender or government entity, such as Fannie Mae or Freddie Mac, owns the property rather than an individual or business. There are a handful of situations where this can happen.
Often, a bank or other institution becomes the owner of property when the original mortgage holder severely defaults on their loan. If this occurs, the homeowner may have the option to go through a short sale in order to unload the property and pay off their remaining loan.
If the borrower is unable to sell the home and/or pay back the mortgage, the lender will foreclose on the property and attempt to sell it at auction. However, it’s common for foreclosed properties to go unsold. At this point, the lender becomes the owner of the property, and so it will sit on the bank’s books until they’re able to sell it other ways.
A mortgage holder in default may also opt for a deed in lieu of foreclosure, which means they transfer interest (ownership) of the property directly to the lender in order to avoid foreclosure proceedings.
If a homeowner passes away, or they have a reverse mortgage that comes to an end, the property may be returned to the bank if the heirs can’t or don’t want to provide the money to keep it.
How to Buy an REO Property
Banks don’t want REO properties sitting on their books—they’d rather have the cash. That’s good news for you since REO listings are often priced at or below market value to entice buyers.
Here are some steps you should take if you’re considering an REO property.
1. Get Pre-approved for Financing
Lenders want REO properties off their books ASAP, so you don’t want the mortgage process to slow everything down. You may want to get preapproved for a home loan before you start house-hunting so you know your exact budget and can come to the table prepared, with financing already secured.
If you plan to pay in cash, you will need to secure a Proof of Funds letter from the institution that’s holding your money. This lets the selling bank know that you are financially qualified to purchase the property.
2. Find REO Properties
Once you know the price range you’re working with, it’s time to browse REO listings. Here are a few ways to find them:
- Search the Multiple Listing Service (MLS). This national database connects real estate buyers, sellers and brokers. You can search the MLS specifically for REOs.
- Check lender-specific listings. You can also go directly to a lender’s online listings to see what REO properties it currently holds.
- Ask a real estate agent. A real estate agent should be able to point you toward REO listings in your neighborhood. Some real estate agents specialize in REO properties, which can help you find exactly what you’re looking for. It’s important to keep in mind that some agents do not prefer doing business with REO properties so ask the agent upfront about their experience in this area.
- Review national real estate websites. Free websites such as Zillow and Trulia allow you to search for REO properties in any city.
3. Consider Hiring a Buyer’s Agent
You don’t need your own agent to buy REO property, but it might save you some time and stress to have someone negotiating with banks on your behalf. A buyer’s agent will do just that. Plus, they have a fiduciary responsibility to advocate for your best interests. Even better, the seller typically pays the buyer’s agent, so there’s no additional cost for you to hire one. Ideally, you should work with an agent who has experience dealing with REO properties.
4. Make an Offer
Once you’ve found the right property, it’s time to make an offer to the lender. If you’re working with an agent, they can help you determine what offer is likely to get accepted and submit the offer on your behalf. It’s important to get this right—if you attempt to lowball the bank, they will likely reject your offer and move onto the next prospective buyer.
If your offer is accepted, you will sign a contract with the bank and transfer ownership. You might also be required to pay an earnest money deposit upfront, which is typically 1% to 2% of the purchase price and held in an escrow account until the sale goes through.
Also, keep in mind that with REO properties, the seller will likely charge a penalty for every day closing is delayed past the deadline. Having inspections scheduled ASAP and securing your financing ahead of time can help avoid any delays.
5. Get a Home Inspection
A home inspection is a crucial step when buying an REO property. These homes are sold as-is, meaning you are responsible for any repairs needed.
The property you’re eyeing may be in pretty good shape. On the other hand, it’s common for foreclosed properties to be neglected or damaged by the former owners. A professional inspection will uncover any hidden issues and give you a sense of how much you’re likely to spend to make the home more livable after it’s purchased. It may turn out that an REO property is out of your budget once maintenance and repairs are factored in.
Also, the lender might have performed an inspection when the property became bank-owned. If so, you can review the report and decide if it’s comprehensive enough. However, if the property has been sitting vacant for a long time, you may want to have another inspection done. This typically costs between $300 and $500.
6. Perform a Title Search
In addition to a home inspection, it’s important to perform a title search on the property you’re considering. There could be a lien against the home, which is another nasty surprise you want to avoid.
For example, the previous owner may have owed property taxes. When you buy an REO property, you will likely receive a quitclaim deed rather than a warranty deed. This means the lender is simply transferring interest of the property and can’t guarantee there aren’t any lingering judgements against it. Several types of liens survive the foreclosure process, which means you would become responsible for them once you buy the property.
Fortunately, liens are public records, so you can search a property’s title for any issues. You can also hire a title search company to do this for you. The cost varies by state but averages about $150.
Pros & Cons of REO Properties
Buying REO property might seem like a cheaper and faster way to buy a house, which it can be. However, these properties come with some risks, too. Consider these pros and cons before deciding whether an REO property is for you.
Pros of REO Properties
- Lenders are motivated to sell: Banks don’t want a bunch of properties sitting on their books. That means holders of REO properties are eager to sell and will work to offload a property quickly. That can mean a leg up on negotiations and potentially better terms for you.
- The price will likely be competitive: Because lenders are so motivated to sell, properties are usually priced lower than other homes on the market. That doesn’t necessarily mean you’ll get an REO property for cheap. Lenders still need to recoup their losses, after all. But it does mean that you probably don’t have to worry about inflated prices in a hot housing market.
Cons of REO Properties
- REO properties are sold as-is: Lenders with REO properties are attempting to minimize their losses. That means they won’t invest anything in fixing up a property before selling it. You have to agree to buy the property as-is, meaning there could be expensive repairs or hidden damage that you’ll need to pay. That’s why getting an inspection is so important. You don’t want to discover water damage or a termite infestation after the sale goes through.
- There could be other hidden costs: Aside from general repairs and upgrades that may be needed, there could be other costly issues. For instance, it could turn out that there is a lien against the property. You can buy title insurance to avoid this issue, but that’s one more expense that can eat into your budget.
How much should I offer on a bank owned property? ›
The longer the bank has held the property, the greater the odds that it will seriously consider low offers. You could make an initial bid at a price that's at least 20% below the current market price, or even more if the property is located in an area with a high incidence of foreclosures.What does REO stand for in banking? ›
Real estate owned is the term for a property owned by a lender because it failed to sell in a foreclosure auction after the borrower defaulted on their mortgage. Banks attempt to sell their REOs using a real estate agent or by listing the properties online.How do I find bank owned properties in my area? ›
Bank-owned properties are on the Multiple Listing Service (MLS), the database that real estate agents use to see and post listings of homes for sale. Bank websites. Some banks let you search for real-estate owned properties on their websites. Specialty real estate listing websites.How do you make an offer on a bank owned property? ›
Bidding on a bank-owned home works differently than any other auction. When purchasing an REO property, interested buyers submit their 'highest and best offer' to the bank. The bank will then review the offers (or have an asset management company do it) and choose the best bids to work from.How do you buy a foreclosed home from the bank? ›
- Purchase from a lender, such as a private bank or insurance companies. Interested buyers can inquire via websites or offices, or source listings through SPAV companies who help banks sell off non-performing assets. ...
- Auction from a government agency.
If there is no successful purchaser of the property, the lender or the investor on the loan takes over management of the property. If the property is occupied, the occupant will be evicted.What does the name REO mean? ›
Meaning:River. With Mexican and Spanish influence, Reo—the Anglicized “rio”—is a boy's name meaning “river.” This nature-inspired definition will make baby feel at home whenever by the coast or river.What is REO in US mortgage? ›
Real estate owned (REO) is a bank-owned property that failed to sell at a foreclosure auction.Where do banks sell repossessed houses? ›
There are two different avenues to choose from when it comes to buying a repossessed property: via an estate agent or at an auction. Lenders use both of these methods in order to sell these properties as quickly as possible.How do I get a free list of foreclosures in my area? ›
- Equator.com. ...
- HomePath.com. ...
- HomeSteps.com. ...
- Zillow Foreclosure Center. ...
- Realtor.com Foreclosures. ...
- Bank of America-owned properties and foreclosures. ...
- RealtyTrac. ...
What is a REO foreclosure? ›
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. There are multiple reasons why this might happen, the biggest one being that the home went into foreclosure.Do banks lose money on foreclosures? ›
Lenders do not always lose money in the foreclosure process. It is possible that a lender can make enough money off of interest payments and a foreclosure auction to not suffer a loss, but this is not always the case.Do banks like cash offers? ›
Although a cash offer may be lower than a financed offer, banks may prefer to work with a cash buyer that closes quickly and doesn't mind a property in need of work.Are foreclosures cheaper? ›
Yes, foreclosed lots are way cheaper than houses and lots you can buy from developers. However, what you should consider is the amount of time and effort that you need to have to make sure that the home is livable.What are the disadvantages of buying a foreclosed home? ›
- If you buy at auction, you won't be able to inspect the inside of the house beforehand.
- The process takes longer than a traditional buying process does.
- There may be expensive repairs you need to make.
- You may be put in a position where you have to evict the previous residents.
- You're buying the home as is.
When buying pre foreclosures, instead of making the conventional down-payment, you'll instead cover what the current homeowner owes. That means you'll be responsible for the loan balance, any potential liens on the property, and any unpaid mortgage and homeowners insurance.Is it safe to buy foreclosed properties? ›
Buying a foreclosed home is riskier than buying a home that's owner-occupied. Below are some of the drawbacks to buying a foreclosed property. Increased maintenance concerns: Some homeowners have no incentive to maintain the home's condition when they know they're going to lose their property to foreclosure.How long can tenant stay in foreclosed property? ›
You may have the right to stay in your home for 90 days or longer. Depending on your situation, you may not have to move at all. For example, if your building or complex has five or more apartments and you are elderly or disabled, you may have additional rights to stay in your apartment.What is a HomeSteps property? ›
HomeSteps® is the Freddie Mac sales unit responsible for marketing and selling Freddie Mac real estate owned (REO) homes to homeowners and investors. HomeSteps manages every stage of the REO process, from handling title issues after foreclosure to working with local listing agents to facilitate a sale.How do you evict someone after foreclosure in Texas? ›
The Texas county constable's office where the home is located serves eviction notices with a court date for an eviction hearing. After the judge issues a ruling, the former homeowner has five days to vacate the property or appeal the ruling.
What nationality is REO? ›
REO Speedwagon (originally stylized as R.E.O. Speedwagon) is an American rock band from Champaign, Illinois.What does name Leo mean? ›
What Does Leo Mean? Stemming from the Latin word for lion, the name Leo dates back centuries. In German, it has its own translation, serving as a short version of Leon or Leopold most often and meaning "brave people" or "lion-hearted."Can REO be a girls name? ›
The name Reo is boy's name .What is Oreo in real estate? ›
Share This Page: National banks may hold other real estate owned (OREO) under certain circumstances for prescribed periods. Real property becomes other real estate owned through a variety of circumstances; for example, as conveyance in satisfaction of debts previously contracted or the relocation of banking premises.What is a Fannie Mae property mean? ›
Key Takeaways. Fannie Mae HomePath properties are foreclosed properties owned by Fannie Mae. HomePath homes come with a variety of perks, such as lower price points and special financing options. Because the homes are foreclosures, they may need repairs.What is the REO industry? ›
What is REO? Real estate owned (REO) is the term for a residential property acquired by a bank or other lender in a foreclosure auction. REOs are often sold at a discount, however, they are usually sold “as is” and are sometimes in disrepair.How much do repossessed houses sell for? ›
Homes being sold after repossession can often be bought at a significant discount. Prices can be 10-30% less than the current market value. Lenders are often wanting a quick sale with repossessed property as it's losing money while the house sits empty.Is it cheaper to buy a repossessed house? ›
Are Repossessed Houses Cheaper? It is possible to pick up real bargain property by buying repossessed houses. As creditors are focused on regaining monies owed, repossessed houses often come with low purchase prices.What do I need to know about buying a repossessed house? ›
- Investigate the property thoroughly. ...
- Get a good mortgage deal. ...
- Know that the lender DOESN'T have to take the house off the market. ...
- Check out what the situation with tenants is. ...
- Switched-off utilities. ...
- Check your credit rating. ...
- Check the post. ...
- Beware missing fixtures and fittings.
There are two different avenues to choose from when it comes to buying a repossessed property: via an estate agent or at an auction. Lenders use both of these methods in order to sell these properties as quickly as possible.
Why are repossessed houses cheaper? ›
Lenders tend to want to sell the property as quickly as they can, so they will tend to price them below the market rate and have them available immediately. Because of this, repossessed properties tend to sell for up to 30% less than they would be expected to if they were sold privately.What happens if you buy a repossessed house? ›
Unlike a normal purchase, when you put your offer is accepted by the seller, the seller takes the property off the market. When buying a repossessed property, the bank continue to market the property to seek a higher offer until you exchange.Do you get any money back when your house is repossessed? ›
After a repossession order, you have no house, but you may still have the debt. This depends on how much of your mortgage is unpaid. If the mortgage amount due is low, the bank or lender will return you your money after paying all the fees and recovering its debt once the sale is made.Do you pay transfer fees on bank repossessed houses? ›
The main benefit of buying a repossessed house is lowering your costs. Firstly, on a repossessed property you don't pay transfer duties (the tax normally levied on the value of the property).How long does it take for a bank to repossess a house? ›
With the various steps that lenders need to follow to apply for a repossession order, the whole process can take up to 9 months. This can differ case to case, but in general, it's quite a slow process.What is an easy sell property? ›
EasySell is a private sale programme designed to help you sell your property and settle your home loan with as little stress as possible.How do you tell if a house has been repossessed? ›
One of the most obvious signs that a property has been repossessed is the use of 'do not use tape' or other forms of restrictive tape. This often has a blue or red colour and is taped over appliances such as toilets, ovens, taps and other appliances.What does public notice mean on a house? ›
What these terms mean. These terms are typically given to properties where an offer has already been made but the mortgage company continue to market the property, in order to achieve a higher price.How do you buy a foreclosed home in California? ›
- Step 1: Get Pre-approved for a Mortgage. ...
- Step 2: Hire a Real Estate Agent (Optional) ...
- Step 3: Search for Foreclosed Homes. ...
- Step 4: Submit Offers or Make Your Bid. ...
- Step 5: Secure Your Property. ...
- Step 6: Get the Home Appraised. ...
- Step 7: Close the Sale.
- Hire a Florida Realtor Experienced in Foreclosures.
- Find Homes Being Foreclosed.
- Look at Compas and Perform Due Diligence.
- Secure Financing.
- Attend the Auction, Bid, and Win.
- Wait Until You Receive Title.
How do you buy a foreclosed home in Alberta? ›
In Alberta, the Real Estate Act favours settling foreclosures via a judicial sale, where a lender can only accept an offer to buy a property in foreclosure by going to court. The process can take days to several weeks, meaning other interested buyers can also write an offer after you have already submitted yours.How many repossessions are there in the UK in 2022? ›
Compared to the same quarter in 2021, orders are up 496% to 2,382 and warrants are up 361% to 2,419 in April to June 2022. Historically, repossessions by county court bailiffs fell from a high of 9,284 in Q1 of 2009 to 934 in Q3 of 2018, the lowest recorded level of the series at the time.