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REO Homes

You may have heard the terms REO home, bank-owned home, or foreclosed home. Maybe you’ve considered buying a foreclosed home, but don’t know where to start or what to expect. Let’s start off by answering a few common questions we get from readers and customers.

Common Questions About Real Estate Owned Homes

What is an REO?

REO stands for Real Estate Owned, and it means that the home is owned by the bank. REO homes are also called bank-owned homes, or foreclosed homes

How does a home become an REO?

Typically, the owners will fall behind on their mortgage payments, or may even intentionally stop making payments. They may have the opportunity to sell the home at a break-even price, or for less than they actually owe (this is called a short sale). If the owners cannot sell the home or make their payments, the bank will try to sell the home at auction. If that fails, the bank will take ownership of the home. This is known as foreclosure.

What’s the difference between an REO, bank-owned, and foreclosed home?

There’s no difference between an REO, bank-owned, or foreclosed home. They all mean the same thing: a home that has been repossessed by a bank. Some of these homes may be listed with the local MLS. Bank-owned homes that are not listed may still be in the process of getting prepped for sale, or the bank may be holding these homes back to wait for a more favorable time to sell.

Is an REO home the same thing as a short sale?

No. Think of a short sale as an owner’s last-ditch effort to sell the home before the bank forecloses on it. If the owner can make a successful short sale, the bank will collect at least a portion of what it’s owed. If not, the bank may eventually foreclose on the home, and attempt to recover its money by re-selling the home to another buyer. See our short sale page for more information.

Are REO homes always a great deal?

In real estate, there’s no such thing as a surefire great deal. Every home is different, and every purchase is unique. REO homes can represent a good opportunity for a home-buyer, but they can offer unique challenges that may not be for everyone. You may also be responsible for extra fees and expenses when shopping for an REO home, whether or not you end up closing the deal. These fees can really add up if you end up touring and making offers on multiple homes.

How long does it take to buy an REO home?

It varies. When the glut of REO homes first hit the market, the process of buying them was usually long and prone to failure. Most banks simply didn’t have a good process for selling large numbers of REO homes. However, many banks have streamlined their process to the point where buying an REO home doesn’t take much longer than a standard home, typically 45-60 days.

Touring REO Homes

Touring an MLS-listed REO home is similar to touring any other MLS listing. The home will be represented by a listing agent, who will meet you at the home. You’ll show up with your agent, look around, and ask questions.
There are a few key differences to be ready for, however. For one, the home is likely to be without power, water, and heat. This is because banks shut off these services to protect the home and save money on maintenance. Secondly, an REO home may not be in pristine condition — some homeowners will purposefully sabotage a home after they’ve been foreclosed upon, or may strip the fixtures, door knobs, appliances, and even the copper plumbing on their way out. Even if the previous owners left the home in pristine condition, a home inspection is a must-have for this type of purchase.

Buying an REO Home

Get your finances ready: Banks don’t want to mess around with an iffy buyer. If you make an offer on an REO home, your loan pre-approval has to be airtight. Many banks will actually charge you a fee of around $150 per day for any closing delays caused by late financial paperwork. Also worth noting is that some banks will give preferential treatment to buyers who are pre-approved with their own lending department.

Do your homework:

We will help you in determine your offer amount by conducting a thorough Comparative Market Analysis of similar homes, and using that as a benchmark to determine your offer. After you get your home inspection, you can try to renegotiate your offer amount with the bank though banks typically won’t fix problems found during the inspection.
Make your offer: Once you’ve got your homework done, it’s time to make an offer. Make sure your offer includes an inspection contingency that let you exit the purchase if your inspection discovers a serious problem with the home. This contingency will also give you the leverage you need to renegotiate with the bank on your offer price or to cover any repairs recommended from your inspection.

Get a thorough home inspection:

An inspection is important for any home purchase, but it’s absolutely critical for an REO. Banks tend to put minimal effort into restoring and repairing homes that may have been trashed during the previous owner’s exit. Consider specialized follow-up inspections, such as a sewer scope to make sure no one flushed concrete down the plumbing (it does happen!)

Renegotiate:

Once you’ve had the home inspected, you could use what you found to negotiate your offer price. Other comparable homes in the area may be going for $400,000, but if this home needs $30,000 in repairs, that’s a strong negotiating point in your favor. Don’t expect a bank to roll over on price — you’ll need to document potential repair expenses to make a strong case.

Close the deal:

Continue working with your agent, attorney, escrow and/or title company to close the transaction.