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<\/a>What are real estate-owned homes?<\/h2>\n
Real estate-owned homes, also known as REOs or bank-owned homes, are properties that have gone through the stages of foreclosure, failed to sell at auction<\/a>, and have been taken over by the mortgage lender, most commonly a bank. They arrive in the lender\u2019s hands after the borrower defaults on the mortgage payments and, after the foreclosure proceedings, the bank takes ownership of the house. On some occasions, a property may become real estate-owned if a homeowner gives the lender the deed to their home in lieu of foreclosure<\/a>.<\/p>\n You may also find REO properties owned by government-sponsored enterprises (GSE) such as Fannie Mae<\/a> and Freddie Mac<\/a>. After all, both organizations are in the business of buying mortgage loans from banks and other non-bank lenders.<\/p>\n Interesting fact:<\/b> The term \u201creal estate-owned property\u201d originally comes from a bank\u2019s accounting terminology. Most banks have an \u201cother real estate-owned\u201d section<\/a> on their balance sheet to list assets owned by the bank that are not part of their primary business. For example, a foreclosed property is now back in the bank\u2019s hands and no longer produces any income for the bank. Eventually, the term was taken to label these bank-owned properties.<\/p>\n According to Arizona real estate agent Kyle Keller<\/a>, who has over 20 years of experience, real estate-owned properties are found everywhere, but you\u2019re seeing less of them since the COVID-19 pandemic started. In June 2021, distressed sales, which includes REO sales, foreclosures, and short sales, represented just 1% of sales in the U.S<\/a>, according to the Department of Housing and Urban Development<\/a>. That\u2019s because many states enacted foreclosure moratoriums<\/a> that prevented lenders from evicting homeowners, especially those facing financial hardships, during the crisis. But Keller emphasizes they may become more common once those protections end throughout 2021.<\/p>\n However, for the real estate-owned homes that do come onto the market, there are several places buyers can look to find them. Let\u2019s take a look.<\/p>\n As we mentioned, a real estate-owned property usually goes through several steps of foreclosure before it\u2019s officially in the hands of the lender or bank. While the process may differ by state<\/a>, there are certain general stages that are important to know when looking at REOs.<\/p>\n The biggest reason a buyer might seek out real estate-owned homes for sale is that they\u2019re looking to score a good deal. But are they actually cheaper? The short answer is: usually, but it depends.<\/p>\n Keller, our Arizona real estate agent, says some REOs can be bought at a discount, at least compared to homes in the same area. After all, banks generally don\u2019t want to have properties on their books that aren\u2019t bringing in any money. So if a home doesn\u2019t sell at auction, a bank may likely want to get rid of it, even if that means it\u2019s at a lower price. In fact, REO properties sold at a 36% discount<\/a> compared to the average home price in the U.S. during the third quarter of 2020.<\/p>\n At the same time, the deal might not always be as sweet as it looks on paper. Like any business, banks are looking to make money \u2014 or at least recoup their losses from the defaulted mortgage previously on the home. So, depending on the circumstances, they will still try to get a fair price for the home, meaning some REOs don\u2019t come at the deep discount you might expect.<\/p>\n Even if you can get a real estate-owned home at a good deal, there\u2019s usually a trade-off. Let\u2019s take a look at the challenges you might face.<\/p>\n Most lenders sell their REOs \u201cas-is<\/a>,\u201d meaning in the exact condition you find them. Unlike a typical seller who might be willing to negotiate on potential repairs or at least offer a credit, the bank will usually leave all of those potential issues in your hands.<\/p>\n Keller warns that many REOs may be in rough condition, especially if they\u2019ve sat vacant for a while. In most cases, you can still ask for a home inspection, but you\u2019re most likely not going to receive a seller\u2019s disclosure<\/a>, Keller says. So it will be harder to learn the property\u2019s history than it may be with a typical transaction.<\/p>\n Plus, if a home has been vacant, it might have been subjected to squatters and vandalism. Keller says he\u2019s seen many real estate-owned homes for sale where the air conditioner units have been taken, as well as copper pipes and wiring stolen. That will only add to the cost of repairing the home.<\/p>\n \u201cOnce you figure out how much money it\u2019s gonna take to get the home in good condition, you could actually end up spending more money buying an REO home than buying a regular home that\u2019s already in good condition,\u201d Keller says.<\/p>\n The average closing time on a home in the U.S. takes anywhere from 30 to 60 days. But when you buy an REO home, you\u2019re not dealing with the average seller. You\u2019re working with an organization that has rules, a hierarchy, and approval processes. That means the transaction and closing may be held up with delays \u2014 ranging from a few weeks to more than a month \u2014 and the potential for inconsistent communication, especially if the bank that owns the home isn\u2019t local.<\/p>\n Many banks and lenders will approve a loan for an REO home. However, financing may be tough to receive depending on the condition of the home, Keller says. That\u2019s because many banks and government-backed loan programs have minimum standards<\/a> a home needs to meet for mortgage approval.<\/p>\n Due to that, Keller says cash buyers might be better suited for an REO property, especially those who have the resources to make extensive repairs. That\u2019s why investors tend to look at REOs. They may have the cash, time, and resources needed to pursue these types of homes that many traditional buyers don\u2019t have.<\/p>\n Buying a real estate-owned home isn\u2019t that much different than buying your average property, but there are some unique aspects. Let\u2019s take a look at what those are and what steps you should take to protect yourself.<\/p>\n Getting pre-approved for a mortgage<\/a> is beneficial in any home search. However, when buying an REO home, it can help speed up the process and potentially make you a more attractive buyer to the bank. This can be especially true if you get preapproved through the same bank that\u2019s selling the home as this might streamline communications a bit as you work your way\u00a0 through the transaction process.<\/p>\n Again, a real estate agent is extremely valuable<\/a> no matter the home you\u2019re buying. But a knowledgeable buyer agent can help you find the right REO home, walk you through the challenges, and help you protect yourself throughout the process. An REO transaction can become all too confusing, but a trusted agent will tell you what\u2019s worth pursuing and what\u2019s too good to be true.<\/p>\n Before you make an offer, take a look at similar homes in the area and pay attention to what price they sold, Keller says. This will give you a good idea of what the REO may be worth and if the listing price is reasonable. It will also give you a better idea of what your offer should be. Keller also says to keep in mind any potential repairs you\u2019ll have to do and the associated costs. It\u2019s essential to look at the entire amount you\u2019ll invest in the property, not just what the purchase price will be.<\/p>\n \u201cMake sure that homes in that neighborhood in good condition aren\u2019t selling for [less than your investment],\u201d Keller says.<\/p>\n \u201cAt that point, you might as well just buy a traditional home in good condition.\u201d<\/p><\/blockquote>\n With help from your agent, your research should have given you an initial offer amount that makes it a good deal for you and fair for the bank. Now it\u2019s time to go for it.<\/p>\n Include a cover letter that states why you\u2019re interested<\/a> in the home and why you\u2019re the best choice for the bank. Keeping the amount as close to the listing price and with as few contingencies as possible may help you close the deal as well. And, if you\u2019re willing, it may be helpful to state in your letter you\u2019re willing to take the property \u201cas-is.\u201d The bank will most likely be looking for a clean offer that makes the transaction a little easier.<\/p>\n However, that doesn\u2019t mean you should just give up any negotiating power you have. Keller says, like a traditional transaction, it\u2019s still ok to ask for a home inspection<\/a>. That way, you can include an inspection contingency and potentially back out of the deal if you find too many issues.<\/p>\n Just like any average home purchase, there are ways to protect yourself in the process. Keller recommends getting a home appraisal<\/a> and completing the home inspection, even if you\u2019re buying the property in cash (if you\u2019re financing, the lender will require an appraisal). Even if they don\u2019t allow you to back out of the sale, they will at least provide you more information on what you\u2019re getting into.<\/p>\n A title search<\/a> to check for liens or judgments is helpful during this step, but not always necessary, Keller says. He says a bank-owned property will most likely have a clean title and no lien issues because the bank usually straightens that out during the foreclosure process, but you should always check to confirm.<\/p>\n As we mentioned before, financing can be challenging with real estate-owned homes for sale, but it\u2019s not impossible. If a conventional loan doesn\u2019t work out, take a look at a few special programs that may help with bank-owned properties.<\/p>\n After you have your financing approval, you should be all set to sail through your closing. Pretty soon, you will have your (previously) real estate-owned home in your own hands. And you\u2019ll have all the information to know you made a sound, secure investment every step of the way.<\/p>\n Header Image Source: (Maximillian Conacher \/ Unsplash)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" Real estate-owned homes might look like a great deal, but they may come with plenty of risks. Here\u2019s what you need to know and find out if it\u2019s right for you.<\/p>\n","protected":false},"author":236,"featured_media":25722,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","cybocfi_hide_featured_image":"","footnotes":""},"categories":[192,629,635],"tags":[],"class_list":["post-25706","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-for-buyers","category-home-financing","category-auctions-foreclosures"],"acf":[],"yoast_head":"\nHow do you find REOs?<\/h2>\n
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Stages of foreclosure<\/h2>\n
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<\/a>Are real estate-owned homes cheaper?<\/h2>\n
Risks of buying an REO property<\/h2>\n
They\u2019re usually sold \u201cas-is\u201d<\/h3>\n
They may be distressed<\/h3>\n
It may be a lengthy process<\/h3>\n
Financing may be tricky<\/h3>\n
<\/a>How to buy an REO<\/h2>\n
Get mortgage pre-approval<\/h3>\n
Find a real estate agent<\/h3>\n
Research comparable homes<\/h3>\n
Make an offer<\/h3>\n
Protect yourself<\/h3>\n
Secure your financing<\/h3>\n
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