What is REO Property?

Real Estate Owned (REO) Properties

Properties that undergo foreclosure auctions typically owe more to the financial institution than what the market value of the property is. There is not much value in such properties and often the foreclosure auctions do not even attract any bids. Thus, very few foreclosure auctions result in sale and properties that fail to sell in a foreclosure auction go back to the financial institution holding the lien on it. Such properties are called REO (Real Estate Owned) properties.

Once the property has returned to the bank, the mortgage loan no longer exists and the bank pays off any outstanding dues such as the homeowner’s association fee. The bank may also work with the IRS and have the tax liens removed. In addition, in order to make the property attractive to the buyers, the bank may also evict the current owners and make some repairs to any damages in the property.

Buying a REO Property

The appeal of REO properties lies in opportunities to purchase real estate with significant leverage, fast turnarounds with highly speculative properties and above market returns. REOs are sold directly by the banks and they strive to get the maximum value from the sale. Bank foreclosure departments want to sell their foreclosed properties quickly for two major reasons:

• First, they are required to set aside capital reserves for foreclosed properties they own; this ties up money that could be put to use elsewhere.
• Second, they do not want the management headaches.

Financial institutions are extremely sophisticated sellers with dedicated departments to manage foreclosures and REOs. The process begins with the potential buyer making an offer to the bank which is reviewed by multiple individuals in the bank. Typically, the bank makes a counter-offer to which the buyer makes another counter. Once the price and other terms and conditions are mutually agreed, the transaction is executed.

At the time of making the offer, the buyer should look at the prices of comparable properties in the neighborhood and factor the costs of doing any repairs. It should be noted that on most occasions, the bank will sell the property on an as is basis. This makes it critical that the buyer thoroughly inspects the property and the offer includes an inspection contingency period. This should let the buyer terminate the sale if any unanticipated damages are discovered during the inspection which the bank refuses to fix.

REO properties require time, money, and effort to make profitable; therefore, the purchase price should be a substantial enough discount from the potential market price (especially if you’re paying all cash) to justify the risk and effort. You must always keep in mind that foreclosures are problem properties and that when you purchase them you are assuming those problems, which include but are not limited to neglect, vacancies, tax arrears, deferred maintenance, and sometimes necessary capital improvements.