What is a REO Property?

The term REO home stands for "Real Estate Owned" property, which refers to bank-owned and/or foreclosed properties. Maybe you are considering purchasing a foreclosure home, but have no idea where to start or what to expect. It's important to understand the benefits and challenges confronting you as a potential buyer of this type of listing.

What does "REO" really mean?

Real-estate-owned is another term for a forclosure home

This means a homeowner was unable to continue making mortgage payments on their home, therefore it was necessary for the lien holder to take possession of the property. What usually happens is the homeowner falls behind on their payments and they have few options left. They may have been given the opportunity to market their home for sale in what is called a "short sale," meaning the lender would accept a selling price less than what the homeowner actually owes as payment in full. A short sale is not the same as an REO listing and is essentially a last attempt to pay off the mortgage and avoid foreclosure. If the owner cannot sell the home in this manner or continue to make their payments, the lender may attempt to sell the home at auction or decide to simply foreclose, consequently becoming a bank-owned property or REO.

These types of listings may or may not be found within the local Multiple Listing Service (MLS), which provides a data base for licensed real estate brokers to post their listings. When and if an REO gets placed on the MLS varies according to the schedule and plans of each lending institution.

Will I get a great deal?

The answer to this important question is "maybe". You may save on the selling price of the home, but keep in mind, the bank will be trying to recoup as much as possible from the home sale in order to apply the proceeds toward the homeowner's outstanding mortgage balance in the hope of minimizing their loss. If you do happen to get a discount to market you may very well end up paying for any savings so to speak, through your valuable time, effort and uncertainty you have to deal with during the lengthy process. 

REOs offer unique challenges and even a little financial risk, since you may also be responsible for extra fees and expenses, whether or not you ultimately end up acquiring the home. For example, there is the home inspection, which buyers should absolutely have performed on an REO home. More likely than not, no matter what issues are uncovered, the bank and/or homeowner will not pay for any repairs or renegotiate the agreed-upon selling price. This means you pay for an inspection simply to identify any issues and accept whatever needed repairs as your sole responsibility, or you choose to walk away. Either way, you will not be reimbursed for the cost of that inspection, which could run you approximately $350 to $550 and substantially more if a well and septic system are involved.

You should also consider the value of your time. Depending on where it is in the process, an REO home will more than likely take longer than a typical home to close, which is approximately 45-60 days. However, since the large volume of foreclosures during the great recession, banks have learned how to streamline the REO selling process somewhat. 

Speak to your real estate agent about the pluses and minuses that are involved in the purchase of an REO or bank-owned property. For some home buyers, it can be the answer to finding a new home at a below market price they can afford.