What Does REO (Real Estate Owned) Mean?

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What You Should Know

  • Real Estate Owned (REO) is a property that is owned by a lender because it was not successfully sold during the foreclosure auction.
  • The lenders usually try to sell REOs with the help of real estate brokerage or REO specialists.
  • The REOs are usually sold at a discounted price, but they may require additional repairs by the buyer.
  • REOs are riskier than regular properties because they are often sold “as-is”.

What is REO Foreclosure

Infographic:  How to Buy a REO Property

Real Estate Owned (REO) is a property that is owned by a lender because it was not successfully sold during the foreclosure auction. A mortgage lender, usually a bank, Fannie Mae or Freddie Mac, assumes a title of a landlord for a foreclosed property if the property is not sold for the amount to cover the outstanding amount of mortgage on the house. This foreclosed property that is owned by the lender is called Real Estate Owned.

The lenders usually try to sell REOs with the help of real estate brokerage or REO specialists. They also may try to sell the properties without any external help. In this case, a loan officer may notify clients who are looking for a property, about the REO properties in their portfolio that are for sale.

When a mortgage borrower is unable to pay for their mortgage, the property goes into a pre-foreclosure stage. During pre-foreclosure, the borrower has some options to revert the default. They could try and renegotiate the mortgage payment schedule with the lender. They could also try and short-sale the property or list it for public auction. If none of these options work, the property goes into a foreclosure process where the lender has the opportunity to recover the outstanding balance by selling it at the foreclosure auction. If the auction is not successful, which means that the property was not sold for the price to recover the debt outstanding, then the lender assumes the ownership title. At that point, the foreclosed property becomes Real Estate Owned.

Pros & Cons of Buying a REO

There are upsides and downsides to buying a REO.

Investors may find it attractive to buy a REO because they typically are sold at a discount. This happens because the main objective of an owner of a REO is to liquidate the property promptly and recover the outstanding balance on the defaulted mortgage associated with a particular REO.

On the other hand, the REOs are usually sold “as-is” and usually require repairs. Inexperienced investors may put themselves in a difficult position if they buy a property that requires a lot of capital to be repaired. It might be wise to avoid this type of property if the investor does not have a clear understanding of how much it would require to fix all the issues associated with a particular property.

How to Buy REO Properties

Buying a REO property is quite similar to buying a regular property, but there are a few key differences that a buyer should consider during the process of purchasing a REO property. Regardless of the purpose of buying a REO property, the following steps will help a buyer to go over the process of buying such a property.

Step 1. Search For REO Properties Available

The first step in the buying process is to see what is available on the market. Depending on the objectives of the buyer, there could be different properties available. There are several ways to find REO properties for sale:

  • Bank And Lender Listings
    Typically, lenders and banks are the ones who possess REO properties. Most of them have their own websites where they list those properties for sale. The buyer should go over bank websites and see what they are offering.

  • Multiple Listing Service
    MLS is a service that is used widely for real estate transactions. Even though they focus mostly on conventional properties, they may have some REO properties listed. It might be difficult to navigate through MLS without a real estate agent, so a buyer should consider hiring a real estate agent who is experienced in REO properties.

  • Real Estate Agent Network
    Another benefit of having a real estate agent who has experience with REO properties is that they may have their own ways of finding REO properties. A buyer should communicate with their real estate agent to see whether they know any listings that may fit the buyer’s needs.

  • Other Web Services
    There are numerous services that aggregate listing information all over the US. One of the services that are worth mentioning is Zillow. This website may be useful to find appropriate REO listings.

Step 2. Find a Lender And Get Pre-Approved For REO Financing.

When a buyer finds a property, they should talk to a lender about financing the property. REO properties are considered more risky than conventional properties, so not every lender will be willing to approve a buyer for a REO property purchase. Additionally, the sellers of REO properties are motivated to sell their property as soon as possible. Any delays arising during the closing process may be a dealbreaker for the seller. The buyer should get pre-approved for the mortgage before closing on the property to make sure that they can close the deal quickly.

Step 3. Find a Real Estate Agent With Experience in REO Deals.

REO properties come with their own risks. It is important to find a real estate agent who knows about those risks and who can guide the buyer through the closing process. As mentioned before, a seller is motivated to sell their REO property as fast as possible, and an experienced real estate agent can ensure that the buyer’s offer is competitive and can proceed with closing quickly.

Step 4. Filter Out Properties Until The Best Fit Is Found.

Once the buyer finds an experienced agent, they both can start narrowing down the list of properties to pick the best fit. Every buyer may have their own characteristics of the property they want to look at. The most common characteristics include:

  • Price Range
  • Types of Repairs Needed
  • Location
  • Number of Bedrooms and Bathrooms
  • Neighborhood and Community Resources Nearby
  • Lender-Specific Requirements

Step 5. Get An Appraisal.

When the buyer has found a property that fits, the buyer should pay for an appraisal to see what the value of the property is. Some REO properties are sold for a great price, but it does not make the deal a bargain automatically. Given different factors that affect the value of a property and costs associated with repairing the property, the deal may not be as attractive as it may seem at first glance.

An appraisal will help a buyer to estimate the value of the property objectively. During the appraisal, the appraiser will estimate the value of home systems that include plumbing, HVAC and others, the structural integrity of the property and check the prices of comparable properties. This will help a buyer to make a more educated decision when closing the deal.

Step 6. Make an Offer.

Once the buyer decides to close on the property and ensures the viability of the purchase, the buyer can make an offer. The buyer should work closely with the real estate agent to make an attractive offer and close the deal quickly. It is common to attach earnest money deposit checks to the offer on REO to make the offer look more competitive.

Step 7. Inspect The Property.

When the property is found, the buyer should pay for a home inspection to have a clear picture about what is supposed to be fixed before the property is considered habitable. REO sellers are not likely to engage in fixing the property nor will they be paying for inspection. REO properties are sold as is, so it is essential for a buyer to have a thorough inspection of the property before purchasing it. REO properties may have serious damages that may require a lot of capital and time to repair. Sometimes, the cost of repairs may not be worth purchasing the property, and that is why the buyer needs to do the inspection before closing on the property.

Apart from physical inspection of the property, it is also important to ensure that there are no liens or encumbrances outstanding on the property. REO properties may be sold with outstanding liens. If the buyer will purchase the property when the liens are present, the buyer will be responsible to resolve them. Before closing, the buyer must contact real estate lawyers to do a search for any liens outstanding on the property. It might also be beneficial to consider getting owner’s title insurance to have a protection against other legal claims on the property.

Step 8. Close the Deal

When the buyer has a clear understanding of the repairs and liens that are needed to be addressed, the buyer may choose to close the deal. They will likely need to contact their lender once again to ensure that there is no problem with the mortgage documents. Once everything is in place, the buyer needs to wire the down payment and fill out all necessary paperwork. The rest of the closing process is similar to the closing process of a regular property. The buyer and the lender will sign the documents to transfer the house into the buyer’s name. After that the deal will be closed.

Where to Find REO Properties

If an investor chooses to buy a REO, then the first resource that may be useful to find REOs for sale are publicly available listings from the Department of Housing and Urban Development (HUD), Department of Veteran Affairs, Department of Agriculture, and IRS. Government-sponsored entities such as Fannie Mae and Freddie Mac may also have some REOs listed for public use. Private banks may also list their REOs for sale on their website. They even may be willing to issue a mortgage to the buyer of their REO to ensure a cash inflow for the upcoming years.

Buying REOs is more difficult than buying a regular property because REOs are considered riskier than regular properties. Cash offers are strongly preferred to close the deal on a REO, but it is still possible to close the deal with a mortgage for such properties. The buyer should have a high and consistent income and a mortgage pre-approval letter to make their offer competitive. It might be more difficult to get approved for the mortgage on a REO because they usually require a lot of repairs. It might be wise to provide bank statements, tax forms and disclose other assets in the possession to get a mortgage pre-approval.

Things to Consider When Buying a REO

REOs are riskier than regular properties because they are often sold “as-is”, and they may require substantial repairs. It might be wise to consider the following tips before buying a REO property.

  • Getting a real estate agent with experience in REOs.

    A real estate agent may help identify issues associated with a particular property. If the agent is experienced in REOs, they could guide the investors on how to estimate the amount of capital needed for repairs. The sellers of REOs want to sell the properties quickly, and an experienced agent can ensure that all documentation is ready to make a competitive offer promptly.

  • Getting a Home Inspection.

    Even though an experienced real estate agent may be able to point out some things that need to be fixed, getting a proper home inspection is crucial when buying a REO. It is unlikely that the owner will repair the issues, but with the inspection, the buyer would be able to have an idea of how much the repairs would cost. If the cost of repairs is too high, then the buyer can walk away from the deal before it is too late.

  • Understand Whether the REO Has a General or a Special Warranty Deed.

    A general warranty deed implies that the right to sell the property as they currently own it and that there are no other legal issues or claims to the property. Regular properties are sold with the general warranty deed, but a REO may have a special warranty deed instead. The special warranty deed only implies that the seller has the right to sell the property as they currently own it. It does not guarantee that no fines or liens are outstanding on the property, which will have to be paid by the new owner once the title is transferred.

What Lenders Do With REOs

Lenders may have a portfolio of REOs that they would like to sell to recover the losses on the defaulted mortgages. Usually, they have a REO specialist to sell the properties on their behalf or contact a real estate brokerage to help them liquidate the properties. Their decision about whom to contact depends on the value of their portfolio and the urgency to liquidate the assets.

A lender’s REO specialist usually manages the whole portfolio on the behalf of a lender. A REO specialist markets the properties, reviews the offers for the properties, and prepares reports regarding the status of the REOs in the portfolio. A REO specialist usually works closely with a property manager to ensure that the house is maintained and is ready for sale when needed. The main function of a REO specialist is to help the lender liquidate the REO properties quickly and efficiently. A REO specialist is usually a paid job within the lender’s entity. This means that it might make sense for the lender to hire a REO specialist if they have a large portfolio of assets that need to be maintained and sold.

Some lenders with a smaller portfolio of REO properties may choose to contact a real estate brokerage firm to list their properties on Multiple Listing Services (MLS). This action allows the banks to reach more audiences than they would have using a REO specialist. The agent who is responsible for the listings delivers all the offers to the lender to make a decision. Unlike REO specialists, the real estate brokerage only provides listing services and does not maintain or look after the property in any other way. Brokerages also work for a commission that is paid based on the sale price of the property. A lender may choose the option to hire a brokerage if the portfolio value is relatively small and needs to be liquidated quickly.

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