After a homeowner defaults on their mortgage, the pre-foreclosure period typically involves a public auction in which the minimum bid equals the outstanding loan amount including accrued interest and any fees associated with the sale.
Then, the lender—typically a bank or creditor—will attempt to sell the property on their own. REO properties can be an attractive option for home buyers on a budget for a number of reasons, but they also have downsides to consider. Banks and lenders tend to discount the prices of REO houses in order to entice more potential buyers. Once a property becomes REO, the lender will typically wipe out any liens a form of security interest and other outstanding claims against the home.
This eliminates many potential legal issues that would prevent a prospective buyer from taking full ownership of the property, and can also save buyers lots of money in the long run. Because REO properties are often sold in disrepair, buyers should be prepared to make—and pay for—any necessary renovations to the home. This entails a little more effort than browsing local real estate listings.
You can search for foreclosed properties for sale using federal agencies like the Department of Housing and Urban Development HUD , as well as online databases such as the multiple listing service MLS or Zillow. Lender-specific listings such as PennyMac REO listings also show bank-owned properties on the housing market.
Once you find a property of interest, try to get pre-approved for a mortgage by the lender that owns the home. For example, buyers typically receive a general warranty deed, which states that the current owner has the right to sell the property and that there are no liens or outstanding taxes associated with the home.
However, REO homes are often sold with a special warranty deed, which only guarantees the absence of title issues since the current lender took ownership of the home. Buying REO property might seem like a cheaper and faster way to buy a house, which it can be.
However, these properties come with some risks, too. Consider these pros and cons before deciding whether an REO property is for you. Casey Bond is a seasoned personal finance writer and editor.
Casey is also a Certified Personal Finance Counselor. Follow her on Twitter CaseyLynnBond. She has won several national and state awards for uncovering employee discrimination at a government agency, and how the financial crisis impacted Florida banking and immigration. Select Region. United States.
United Kingdom. Casey Bond, Rachel Witkowski. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. This national database connects real estate buyers, sellers and brokers.
Check lender-specific listings. Ask a real estate agent. A real estate agent should be able to point you toward REO listings in your neighborhood. Review national real estate websites.
That means holders of REO properties are eager to sell and will work to offload a property quickly. That can mean a leg up on negotiations and potentially better terms for you. The price will likely be competitive: Because lenders are so motivated to sell, properties are usually priced lower than other homes on the market. Lenders still need to recoup their losses, after all.
There could be other hidden costs: Aside from general repairs and upgrades that may be needed, there could be other costly issues. For instance, it could turn out that there is a lien against the property. Was this article helpful? Share your feedback. Send feedback to the editorial team. Search For Properties: Before you start the buying process, search for REO properties within your desired price range and market.
Typically, lenders want to get an REO property off of their books quickly, so the more prepared you are with financing options, the faster it will go. Getting pre-qualified by the lender that owns the home can speed up this process as well. They will know that you are financially qualified. In turn, they are more likely to accept your offer. They will be able to guide you in every step of the home buying process. They can also let you know of any other requirements you will need, such as hiring an attorney or inspector for the property.
You should most essentially consider price, repairs, location, number of rooms bedrooms and bathrooms , neighborhood quality, community resources, and lender specified requirements.
Once you have a list of REO properties that fit your requirements, compile a list starting with your most desired. Get An Appraisal: It is always wise to get an appraisal on your desired REO property and compare it to the asking price. While REO properties will be a bargain most of the time, you will want to get comparable prices for properties in the area.
You will also want to determine more reasons the property may be discounted. Is it in an undesirable area? Does the property have a large number of repairs that need to be addressed?
The appraiser will also take into consideration major factors such as HVAC, plumbing, and structural integrity. In the end, an appraiser is highly recommended to determine if the asking price is fair. The agent will then take the offer to the lender, and you may have to file some extra paperwork. It is important to also consider a home inspection before finalizing the purchase. Making the inspection contingent on the purchase can protect you if any major damages are revealed.
By documenting these damages, you may be able to negotiate the price even further. Property Inspection: As stated in step 6, the home inspection process is vital in keeping yourself safe from unknown damages and is useful in negotiating price. Knowing this, an inspection will indicate exactly what you need to do for further inspections. In some cases, the inspection may have already been conducted by the lender once the bank owns the property.
If this is the case, ask for a copy of the inspection report and review it before making any final decisions. Negotiation: Negotiating a deal for a bank-owned property is different than homeowner negotiation.
Banks will always try to get the most profitable price for the property in question. Banks also have to consult with several other people before giving a definitive answer to any of your questions. Your final offer may also require corporate approval.
You may sometimes be asked to sign a purchase addendum that you, your agent, and your lawyer should thoroughly review if possible. Finalize Loan: It is important to note that finalizing the loan happens at about the same time as home inspection and negotiations. During finalization, you will be working with the lender to find the right loan for you. You should also take this opportunity to contact the lender to verify the status of the title. Often, the lender may have a title company waiting.
However, it is not uncommon that you may have to do it yourself. If so, hire a company to do a full title search before closing. This process is much like closing a deal with a homeowner. However, there could be fees you have to pay if you do not close by a predetermined date. Again, you can avoid this by getting pre-qualified for a loan and making sure you get the desired amount on time.
All that is left is for you and the lender to sign the documents transferring the house into your name. Buying bank-owned homes for sale continues to be one of the most misunderstood aspects of real estate investment. For reasons beyond me, REO properties are often associated with costly repairs, liens, and difficult contract negotiations. However, I maintain that buying a real estate-owned property offers an unprecedented opportunity.
The good news is that, unlike in foreclosure auctions, investors can request a home inspection before a contract is signed.
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