Should You Buy an REO (Real-Estate Owned) Property?

Real Estate Owned Properties

Looking for a new place to call home?

You might have stumbled upon listings for real-estate owned (REO) properties. These homes can be real gems, often priced below market value.

But before diving in, there are some important risks you should be aware of when thinking about buying an REO property.

What’s an REO?

An REO property, short for real estate-owned property, is basically a home that a bank or a government entity owns instead of an individual or a company.

You see, when someone who took out a mortgage can’t keep up with their payments, the bank or institution might end up owning the property.

There’s a chance for the homeowner to try something called a short sale to sell the property quickly and pay off what they owe on the loan.

How Does a Property Become an REO?

So, here’s how a property ends up being called an REO.

When someone can’t sell their home or can’t keep up with their mortgage payments, the lender takes action. They might try selling the property at an auction, but sometimes, nobody buys it.

That’s when the lender becomes the owner, and voilà, it becomes an REO property. The property hangs out on the bank’s books until they find another way to sell it.

Sometimes, if the homeowner is having trouble, they might choose something called a deed in lieu of foreclosure. It’s a way to hand over the property directly to the lender to dodge going through foreclosure.

And, in some situations, like if a homeowner passes away or if a reverse mortgage reaches its end, the property might end up going back to the bank if the heirs can’t or don’t want to deal with it.

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How to Find an REO?

Finding REO properties can be a bit like a treasure hunt!

Here are some tips on where to start looking:

  1. Bank Websites: Big national banks often have lists of their REO properties right on their websites. Worth checking out!
  2. Smaller Banks and Lenders: Don’t forget about the smaller players. They might have their own listings of REO properties online.
  3. REO Listing Agents: Look for real estate agents who specialize in selling bank-owned properties. They’re the ones in the know about these deals.
  4. Multiple Listing Service (MLS): This is like the big library of property listings that real estate agents use. You can spot REO properties here too.
  5. Fannie Mae and Freddie Mac: These big entities have their own online lists (Fannie Mae’s HomePath and Freddie Mac’s HomeSteps) for homes that didn’t sell at auctions.
  6. Foreclosure Databases: Websites like RealtyTrac and HUDHomesUSA keep tabs on foreclosed properties, but they might charge a fee for access.
  7. Real Estate Portals: Keep an eye on sites like Zillow, Trulia, and Redfin. Sometimes, unsold auction properties pop up here as REO homes.
  8. Your Network: Don’t underestimate the power of connections! Real estate agents, mortgage brokers, or even contractors might know about REO properties.
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Remember, it’s all about casting a wide net and keeping your eyes peeled in these different places to snag the best deals.

How to Buy an REO?

So, you’ve got your eyes set on an REO property? Awesome!

Here’s what you need to do:

1. Get Your Finances Sorted: If you’re eyeing that REO gem, get preapproved for a mortgage or secure a Proof of Funds letter if you’re paying in cash. Speed is key, as banks want these properties off their books pronto.

2. Think About Having a Wingman: Consider getting a buyer’s agent—they’ll do the negotiating and advocating for you. Plus, it doesn’t cost you a dime extra, as the seller typically pays their fee.

3. Make a Solid Offer: When you find “the one,” make an offer that’s realistic. Going too low might just make the bank turn you down flat. Oh, and be ready to sign a contract and pay a deposit upfront.

4. Check Under the Hood: Get a home inspection! These properties are sold as is, so you want to know what you’re getting into. It’s like giving the house a health check to avoid any surprises.

5. Hunt for Liens: Don’t forget the title search! You want to make sure there aren’t any hidden debts or claims on the property. Sometimes, this step can reveal unexpected stuff that you definitely want to know before sealing the deal.

Pros and Cons of REO?

Pros of REO Properties

Motivated Sellers

The folks selling these REO homes, like banks, are in a hurry to get them off their books. That could work in your favor during negotiations, giving you a better shot at sweetening the deal.

Competitive Pricing

Usually, these properties are priced lower than others on the market. It might not always mean dirt-cheap deals, but you’re less likely to face sky-high prices, especially in a hot market.

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Cons of REO Properties

Sold As-Is

Picture this: What you see is what you get. These properties are sold as is, meaning no fixer-upper projects by the seller. You might stumble upon surprises like hidden repairs or damage, so an inspection is a must-do!

Possible Hidden Costs

Watch out for those sneaky hidden expenses. Things like property liens might pop up, and that could cost you extra. You can get title insurance to dodge this, but it’s another cost to factor in.

Should You Invest in an REO?

Thinking of diving into the world of REO properties for investment?

Here’s a handy roadmap:

1. Define Your Goals: What’s the game plan? Are you eyeing it as your new home, a rental property, or maybe a fixer-upper to flip? Remember, these properties often need some serious TLC, so be clear about your endgame before you leap.

2. Bring in the Experts: It’s like assembling your own Avengers team. Get a contractor to check the property for repairs needed and to sketch out a budget. And don’t forget a seasoned realtor experienced in dealing with REO properties—they’ll help figure out the home’s value post-fixes.

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3. Crunch Those Numbers: Brace yourself for the costs! Besides the property and repairs, you’ve got carrying costs to budget for—loans, taxes, insurance, utilities, and those pesky closing costs.

4. Legal Backup: Consider roping in an attorney. They can be your knight in shining armor, reviewing all the legal stuff the bank dishes out regarding the property sale.

5. Peek Under the Hood: Once it’s yours, get an inspector to check every nook and cranny. Banks aren’t the chatterbox types about the property’s condition, so an inspection is your best bet to avoid nasty surprises. And remember, you can back out if the inspection raises too many alarms within a certain timeframe.

6. Shield Yourself: Title insurance is your superhero cape here. It’s your safety net in case someone pops up later claiming they own the place. Banks wave goodbye to title issues once they sell an REO property.

Investing in REO properties might feel like a rollercoaster ride—exciting but with its twists and turns. Patience is key, especially when dealing with banks and their processes.

It’s a journey with risks and challenges, but with a clear plan, financial readiness, and a pinch of patience, it could be a rewarding path to building your wealth.

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Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns–or dollars. Take your choice–there is no other.

― Ayn Rand, Atlas Shrugged
Pavlos Written by:

Hey — It’s Pavlos. Just another human sharing my thoughts on all things money. Nothing more, nothing less.