How to Buy an REO Foreclosure

A real estate-owned (REO) foreclosure offers investors or potential homeowners the opportunity to secure a property under market value. REO properties have proven that they warrant the attention of investors and homeowners to build equity and asset value quickly. Read on to understand how to buy an REO foreclosure.

What Is an REO foreclosure?

A real estate-owned (REO) foreclosure is a property that entered foreclosure and didn’t sell at auction. Ownership defaults to the original bank or lender if a foreclosed home doesn’t sell.

Suppose a property worth $300,000 went into foreclosure. The property becomes an REO foreclosure if no bids are above the minimum at auction. If the bank receives an offer of 15% or more less than the remaining loan balance, it may accept it to get the property off its books. While the property may require significant repairs or renovations, the lower sale price can more than make up for the difference. 

How Do REO Foreclosures Work?

With an REO foreclosure, the property failed to sell during the foreclosure process or at auction. Now, the mortgage lender owns the property. You can purchase the REO property directly from the lender. REO properties are listed online or sent to auction. Potential buyers can also submit an offer directly to the lender. You can buy an REO property through an REO agent or an auction platform. Because the properties are sold as-is, they are often discounted to sell as quickly as possible.

Potential Benefits of Purchasing an REO Property

Purchasing an REO property has significant benefits, including a lower price, faster closing and the possibility to turn a profit with resale quickly. Here’s why you may want to consider an REO property. 

Lower Purchase Price Than Market Value

REO properties are typically priced below market value to attract buyers. You could purchase an REO property for 20% under market value or more. Lenders eager to get REO properties off the books typically accept offers below the asking price. 

Faster Closing Process

Because the property is already owned by the bank, there is no need to negotiate with an individual seller. This can facilitate a faster closing, giving you more time to complete repairs or renovations and either occupy, rent or resell the property. 

Availability of Financing Options

Banks may provide financing or favorable terms for buyers purchasing their REO properties. You can work with the same lender selling the property to secure more flexible financing options or negotiate more favorable terms. 

Rental Income or Resale Profit

REO foreclosure properties offer both short- and long-term income-earning potential. Buyers can either rent the property for passive income or sell it for a profit after making necessary repairs. You can also occupy the property to gain equity in the home right away. 

Potential Risks and Challenges of Buying an REO Property

While buying an REO property can save you cash, there are significant risks to consider. 

Limited Information About Property Condition

Buyers may not have a comprehensive understanding of the property’s condition or potential issues. This can be more challenging with an REO property. While you could request an appraisal, you might not be able to get a full inspection as you would with other properties. This can lead to major expenses or repairs after you purchase the property. 

Hidden Costs

Buyers may incur additional expenses for necessary repairs or property maintenance. These hidden costs are a gamble you’ll have to be willing to take. For example, if an REO foreclosure property needs a new roof, foundation, HVAC system or other major renovations, you could spend more than you initially saved. 

Competition From Other Buyers 

REO properties can attract multiple offers, resulting in bidding wars and potentially increasing the purchase price. Investors, in particular, look for REO foreclosures as cash buyers, increasing competition to finalize the sale. 

Steps to Purchasing an REO Foreclosure

Here’s what you need to know about purchasing an REO foreclosure. 

1. Research Properties

Research the market and identify REO foreclosures available in the desired area. This involves looking at online listings, contacting local real estate agents and attending foreclosure auctions. Spend some time getting to know the local foreclosure market and signs of major repairs required to estimate REO foreclosure opportunities more accurately. 

2. Secure Financing

Secure financing or establish a budget for purchasing the REO foreclosure. This may involve getting preapproved for a mortgage or determining the maximum amount you will spend on the property.

3. Schedule an Inspection

Schedule a professional inspection of the REO foreclosure to assess its condition and identify potential issues affecting its value or livability. If the seller allows you to perform an inspection, this is the most important step to protect your investment value. 

4. Submit an Offer

Submit an offer to the bank or lender that owns the REO foreclosure. This typically involves working with a real estate agent or contacting the bank’s REO department. As part of the offer, you’ll need to work with a local real estate agent to compare similar properties and look at sales within the last three months. You can also check active market listings and compare the bank’s listing price with the property’s worth.

5. Negotiate the Terms of the Purchase

Next, you’ll want to negotiate the purchase terms, including price, repairs and other contingencies or requirements. This may involve multiple rounds of back-and-forth communication with the bank or lender to reach favorable terms. You can also ask whether the bank has received any other offers. You may also want to mention the inspection results and estimated repairs as a negotiation point. 

6. Fulfill Contingencies 

Fulfill any contingencies specified in the purchase agreement, such as securing homeowner’s insurance conducting additional inspections or a title search with a title company, including confirmation there are no title issues. The lender will ask for confirmation of these contingencies before proceeding with the sale. 

7. Schedule the Closing 

Schedule the closing date and time with all parties involved. This is where the final paperwork is signed, funds are transferred and ownership of the REO foreclosure is transferred to the buyer. By the time you reach closing, you’ll just need to sign the relevant papers and walk out the owner of an REO foreclosure. 

8. Post-Closing Work

After you take possession of the property, you’ll need to work with professionals to handle necessary repairs or renovations. This may involve transferring utilities, updating addresses and coordinating with tenants or occupants, if applicable. 

If you plan to rent the property, it’s also time to consider whether you need a property manager. 

Buying an REO Foreclosure

An REO foreclosure offers the opportunity to purchase a property under market value and build asset value quickly. Whether that’s the right choice for you depends on factors like the property location, repairs required and your cash reserves to perform necessary renovations. With a strong market understanding and research, you could buy a property with exceptional value to rent, resell or live in as your new home. 

Frequently Asked Questions