What Is Real Estate Owned (REO)?
Let me explain what real estate owned, or REO, really means. It's a term for properties that lenders, like banks, end up owning because they didn't sell at a foreclosure auction after the borrower defaulted on their mortgage. When owners can't keep up with payments, the bank repossesses the property and tries to sell it, but if it doesn't go at auction, the lender takes full ownership. These properties often come at a steep discount, but you should know they might need extensive repairs.
Understanding REO Properties
You need to understand how REO properties work in practice. When a borrower defaults, the process might involve a short sale or public auction during pre-foreclosure. If those fail, the lender—whether it's a bank, non-traditional lender, or entity like Fannie Mae—takes over. Lenders sometimes sell these directly without agents, listing them on their websites or informing loan officers' clients. For broader reach, they involve REO specialists who handle marketing, offer reviews, status reports, and deed tracking. These specialists also coordinate with property managers to secure and prepare the properties for sale, aiming to liquidate them quickly.
Special Considerations
There are some special aspects you should consider with REO properties. REO specialists often partner with local real estate agents to list them on the multiple listing service (MLS) for maximum exposure on sites like Zillow, Realtor.com, Redfin, and Trulia. Any offers go through the specialist. Keep in mind, as of 2024, new rules prohibit showing compensation offers on MLSs, which promotes transparency and lets you negotiate commissions separately—potentially saving you money.
Gaining REO Status
Here's how a property actually gains REO status—it's a structured process. It starts when the borrower defaults on their mortgage, usually after a few months without payment. Lenders try to work out repayment first, but if that fails, they move to foreclosure, a legal step to repossess and sell the property to recover the loan balance. If it doesn't sell at auction, it becomes REO, and the lender manages and lists it. As a buyer, always check public records to confirm all liens are cleared for a smooth closing.
Advantages and Disadvantages of REO Properties
REO properties have clear advantages and disadvantages you should weigh. On the plus side, they often sell at a discount because banks aren't in the business of holding real estate and want to offload them quickly, coming lien-free with no outstanding debts or defective titles. Lenders are usually more open to negotiation than regular sellers, helping you secure a lower price. However, they're sold as-is, meaning no repairs from the lender, and they can be in poor condition, leading to high renovation costs that might erase your savings. If it's a multi-family property, you could inherit tenants and become a landlord, so ensure you're compliant with local laws.
Pros and Cons
- Pros: Discounted prices, no outstanding liens or debts, lenders may be willing to negotiate.
- Cons: Properties are sold as-is, high cost of repairs, properties may be tenanted.
Frequently Asked Questions
What does real estate owned mean? It's a property managed by a bank or lender after the borrower defaults and it fails to sell at auction.
How does a property become real estate owned? After default, failed repayment negotiations lead to foreclosure; if unsold at auction, it joins the lender's inventory.
How much should I offer on an REO property? Lenders are motivated, so compare market values and similar homes to make a competitive offer, often below asking.
The Bottom Line
In summary, REO properties offer a way to invest in real estate at a discount since they're lender-owned after failed auctions. Lenders are eager to sell to avoid maintenance costs, but if the property needs major work, your savings could vanish. Approach these as a technical investment opportunity—do your due diligence on inspections and market comps to decide if it's right for you.
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