Buying REO properties can seem like an easy way to get into the real estate market, especially if you don’t have all the funds upfront for a down payment. However, it’s important to remember that purchasing an REO property has several unique advantages and disadvantages that could impact your finances. If you’re curious about buying an REO property, here are some of the pros and cons of doing so.
Real Estate Owned (REO) Property Definition
Some houses don’t sell while they’re in foreclosure and, when they are taken over by a mortgage lender, bank, or mortgage investor, they’re called Real Estate Owned. Contact an REO agent or use an auction site to buy an REO property. Property sales are done as-is and typically sold at a discount in order to move them quickly.
The mortgage lender manages REOs if the mortgage investor does not. In these instances, the mortgage lender would need to be contacted to make a purchase through the auction platform or listing agent.
One of the benefits of buying an REO property is that banks and major mortgage companies are willing to forego an auction process. Thus, they often have the best offers, since the deals are already gone, so to speak.
If you’re interested in these properties, it’s essential to know they are often distressed properties. Typically, these properties are foreclosed because someone falls behind on their mortgage. Due to financial issues, people who can’t afford their mortgage payments often don’t have money for upkeep. Additionally, those who are facing foreclosure usually have little incentive to maintain their property.
What Is REO Status?
An REO property doesn’t necessarily come from a foreclosure; they arise out of situations where the homeowner isn’t making their mortgage payments or can’t pay the property taxes. The terms REO and foreclosure aren’t the same things.
Some cases of REO status arise when a lender is holding the mortgage on a property from a previous owner that moved out or died, usually at the end of a reverse mortgage. Depending on their wishes, the lender or investor may foreclose on the property, sell it to another investor, or foreclose and sell it to an heir.
A home must go through several steps before it becomes an REO property. Here are a few:
- A property becomes available for preforeclosure because the original homeowner fails to pay their mortgage or there are other circumstances that require a house to be lost to foreclosure. In other words, if the owner is months behind on their mortgage and unable to make up ground with their mortgage lender, they will end up losing the house to foreclosure.
- When this occurs, a foreclosure sale is held at a specified price and on a specific day. If no successful purchaser can be identified, the lender or investor taking over the property will take over management. It will be evicted if this property is occupied.
- Houses that do not sell at foreclosure are referred to as REOs. If the price isn’t accepted, it is inventory for sale.
An REO home can be a good idea because they are typically cheaper than a normal home purchase. The lender wants a quick and hassle-free process, so they price these properties to sell quickly.
You’ll want to do a title search and see what guarantees a lender will give you, but foreclosed homes are often better than those previously slated for tax sales. The cause of this is that the new owner of the home, who assumed ownership from someone else, often inherits the taxes in arrears. This can often be a surprising discovery.
As a result, banks, mortgage lenders, and other mortgage investors may be more motivated to sell the property faster than you are. You may be able to negotiate a price with some flexibility if you get some advice from your lawyer or real estate agent.
REOs have one drawback: when you buy one, it is sold “as-is.” So, you get the house and everything associated with it. There could be a luxurious spa-like bathroom, but it could also mean a hot water heater that doesn’t work.
In addition to that, you might not get a full guarantee that no one else owns the home, so an owner’s title policy can prove invaluable as protection in case there are title problems in the future.
Previously, the homeowner may not have had the financial resources to repair the property and made do with the status quo. Furthermore, a person who has been foreclosed on may not take pride in his or her home, whereas if he or she had not lost the property he or she would have taken a great deal of pride in it.
As a general rule, homeowners should budget 1% – 3% of the home’s purchase price per year for general maintenance. For example, a foreclosed home may require more annual maintenance costs.
Inspecting the property before landing the deal will give you peace of mind. The lender or mortgage investor will probably not fix anything since they want to make as much money as possible, but this could provide you with negotiating leverage. Also, you’ll know what to expect.
A lender or their representative will evict the previous owner of a single-family residence. You’ll have to tread cautiously if it’s a multi-family or investment property with tenants. In some cases, you may have to honor the terms of the existing lease. According to the Protecting Tenants at Foreclosure Act, you must give tenants 90 days’ notice.
For any more specific questions, consult with a local real estate attorney.
How To Buy An REO Property
Buying an REO home can be a daunting task. How do you find one and how do you know how much you can afford? Let’s break it down.
Finding REO Homes For Sale
If you are looking for REO property, an excellent place to start is to look at publicly available listings on the HUD website and other sites like those from the Department of Veterans Affairs, Agriculture, and the IRS. You can also search listings from Fannie Mae and Freddie Mac in addition to the federal government’s own listings.
For the most part, large banks would prefer to loan out the property and make money over the long term rather than list it and take on additional liabilities in the form of an MBS. To make this more attainable, you can check to see if any of their properties are on the list of properties they have repossessed and either acquire them or work out a contract to have them sell them to you.
Ready To Make An Offer? Know This First
Because they want to sell their investment properties as soon as possible, a real estate lender or seller will want to ensure the prospective buyer can provide prompt assurances that the transaction will go through right away.
The debt-to-income ratio (DTI) helps tell the story of the monthly mortgage payment you can afford, which will play a part in buying a home.
Getting a mortgage approval will show you the very top end of what you can afford. When you start looking at homes at the top end, it is essential not to go into a bidding war. This way, if you get into a bidding war, you have room to increase your offer.
Here are a few essential items to focus on if you want to purchase an REO property.
- A real estate agent must submit an offer to an REO agent on your behalf since lenders almost never entertain offers from individuals. In REO sales, these agents represent lenders’ interests.
- If you don’t have approval for a mortgage, the lender won’t let you make an offer. They want to know you’re a serious buyer. Therefore, to provide an affidavit testifying your ability to afford the offer you’re making, you need to first get preapproved for a loan. For most home sales, this requirement holds, but lenders don’t usually entertain offers without first being preapproved.
- The HomePath website from Fannie Mae, one of the leading sellers of REO properties, will likely be where you can submit your offer for a foreclosed home.
Final Remarks: Buying REO Properties
Assets belonging to lenders and mortgage investors often contain good deals on houses, as lenders are motivated to liquidate the assets and thereby relinquish them. It’s less risky from an investment standpoint than it is for tax foreclosures. While you might get a better deal on such a home, it’s often sold as is and may need repair. Find an experienced agent to help guide you.