What is a Bank Owned (REO)?

REO is an acronym for “Real Estate Owned”. If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair; however, the potential bargain for these REO Homes is typically less than a pre-foreclosure or auction property.

Bank Foreclosures can become Government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.

There are several ways to locate bank-owned REO properties. With the advent of the Internet, finding bank-owned REO properties is easy. First, investors can search for thousands of bank-owned properties online and through a REALTOR®. Another way to locate REO’s is to go directly to lenders themselves. Each lending institution, however, handles REO properties differently. Some lenders post bank-owned real estate lists on their websites. Smaller local banks usually have one individual who is in charge of the bank’s REO inventory. Larger regional and national lending institutions, on the other hand, have large departments that deal exclusively with selling bank-owned properties. Frequently, this department is referred to as the loss mitigation department. The job of the loss mitigation department is to mitigate the loss or minimize the damage caused by loans that have defaulted, which lenders call non-performing loans.

Anyone can buy a bank-owned REO. The challenge for real estate investors is to reach the person who can make the decision to sell the bank-owned REO property. Each lending institution has different rules and requirements on how they sell bank-owned REO properties. Contact the lender and find out what they require to purchase an REO property.

One of the primary advantages of buying a bank-owned REO property is that investors are purchasing a property without liens or other encumbrances. Before lenders make REO properties available for sale, they typically expunge all liens or claims against the property. Any cloud on the title — a second or third mortgage, mechanics liens, taxes or any other liens attached by creditors — are wiped out. Moreover, skilled investors can negotiate with the lender’s loss mitigation department to discount the price to a fraction of its market value. Besides negotiating price, many buyers of REO properties also negotiate favorable lending terms below existing market rates.

• The bank does not want to carry an REO home on their books any longer than possible. There is some pressure on the bank to sell the home and get it off their books. They may list it at a reduced price to drive a quick sale.
• Bank owned homes are usually sold way below market prices, with great terms like low down payments and low interest rates.
• Since the seller of an REO property is almost always the lender, you can negotiate directly with the bank to have them pay all or part of the closing costs.
• REO’s are usually vacant – the bank has evicted the previous owner, saving you the investor time and emotional baggage involved in the eviction process.
• You typically have the ability to inspect an REO home versus a Foreclosure – enabling you to have a sense of the condition of the home and what (if any) funds you will need to invest in the property to rent it out or resell at a later date.

For real estate investors and homebuyers, bank-owned properties and REO’s offer opportunities that are not available in the pre-foreclosure and auction phase of the foreclosure process. Buying bank-owned real estate offers the foreclosure buyer many advantages:

• Bank-owned properties are usually sold at below-market prices with great terms like low down payments and low interest rates.
• Buying bank-owned properties involves less risk and less competition
• Foreclosures that are owned by banks are usually clear of any liens that may have been recorded against the property.
• Since the seller of REO homes is also the lender, you can negotiate with the bank to have them pay for all or some of the closing costs.
• Bank-owned properties are usually vacant because the banks have evicted the previous owner, saving the investor or homebuyer time, money and emotional toll involved in the eviction process.