Tips for Buying REO Foreclosed Homes

By: Jerry

REO (Real Estate Owned) foreclosure properties are another category of distressed properties that can be purchased at auction.  The term “REO foreclosure” is somewhat of an ambiguous one, but what it essentially refers to is a house that has gone back into the lender’s hands after an unsuccessful foreclosure auction.  

In a bank’s auction process, the minimum bids start at the balance owed to the lender, plus any associated attorney’s fees and other charges.  In a depressed realty market, the loan balance is almost always going to be more than what the property is worth at appraisal.  The buyer must present a cashier’s check for the full amount at the auction, and purchases the house as-is (often with a tenant or the former homeowner still in it).  Not surprisingly, most foreclosure auctions wind up with the house not selling and reverting back to the bank’s hands.

The bank will then negotiate with the IRS to dismiss any tax liens on the property  (same thing with backed-up homeowner’s association dues).  The bank may contract to do some repairs, and may handle the eviction, if necessary.

How Banks Sell REO Properties

At this point, the bank is interested in recovering what it’s got in the property; with so many properties in foreclosure now, they will generally have an entire department devoted to managing REO holdings and REO foreclosure listings.  They will offer a title guarantee as part of the bargain, and will give the buyer a chance to inspect and investigate the property.  

Don’t get the idea, though, that REO foreclosures are a great deal, because often they aren’t.  Also, there’s no face-to-face negotiation (these things are usually done through a third party), which can complicate things.  Be prepared for the following:

• Do your homework on REO foreclosure listings.
• Make an offer, which is usually going to bring a counter-offer from the bank.  This may go back and forth a few times.
• Figure on lining up your own financing.  It doesn’t hurt to ask, but generally the bank will not finance a purchase of this sort.
• Be ready to pay for inspections and pest certifications on your own (this may vary from state to state)
• Be ready to make any repairs on the property yourself (again, this is a case-by-case matter)
• Even after your offers or counter-offers have been accepted,  the bank may still stipulate “subject to corporate approval within five days”
• Rely on your agent or third-party to work out particulars such as disclosure agreements, inspections and fees, pre-approval letters and everything else.  Keep in mind that you’ll owe fees to the third party for their involvement. 

These are often the same lenders who helped set up the house of cards in the first place.  Act prudently when wading through the REO foreclosure listings and when dealing with the bank, and remember that the “$3000 houses“ of late-night TV infomercials do not generally exist in this category.