What Is a Bank-Owned (REO) Property? A Buyer's Overview

REO stands for real estate owned, an accounting term lenders use for property they own outright. In real estate listings it means a bank-owned home: a property that came back to the lender after a foreclosure and is now being sold to recover some of the loan.

The lender is not in the business of owning houses. Holding an REO property costs it money for taxes, insurance, maintenance and security, and empty homes can lose value. So lenders generally want to sell REO properties, but through a structured process with their own rules.

The seller of an REO home might be:

• A bank, credit union or mortgage servicer.
• An investor that owned the loan, with a servicer or asset manager handling the sale.
• A government-sponsored enterprise or agency, such as Fannie Mae, Freddie Mac, HUD or the VA, when they guaranteed, insured or owned the loan.

For buyers, REO is usually the most familiar way to buy a distressed property. The home is listed by a real estate agent, you make an offer and you close through a title company, much like a regular sale. You can browse bank-owned listings on RealtyTrac to see what is available near you.

Most REO properties come from foreclosure auctions where nobody bid more than the lender. The typical path looks like this:

1. The borrower defaults and the lender starts foreclosure, putting the home in pre-foreclosure.
2. The default is not resolved, and the property is scheduled for a foreclosure auction.
3. At the auction, the lender places a credit bid, usually up to the amount it is owed.
4. If no third party outbids the lender, the lender takes title and the property becomes REO.

A home can also become REO without an auction. In a deed in lieu of foreclosure, the owner voluntarily transfers the property to the lender to settle the debt.

Once the lender owns the property, it typically:

• Secures and inspects the home, and may winterize it in cold climates.
• Handles any occupants through cash for keys or the legal eviction process.
• Reviews title and pays or resolves liens that would block a sale.
• Orders a valuation and sets a list price.
• Hires a listing agent or lists it through its own sales channel.

This preparation can take months, which is why a property that went back to the lender at auction may not appear for sale right away.

REO properties reach the market through a few main channels:

• Bank and servicer listings. Most REO homes are listed on the local multiple listing service by agents who specialize in bank-owned sales. These agents represent the seller, not you.
• Government sellers. HUD, Fannie Mae, Freddie Mac and the VA sell homes from loans they insured, guaranteed or owned, each through its own program and rules.
• Online auctions. Some lenders sell REO properties through online auction platforms, which can have different terms from a standard listing.

Some government sellers give buyers who will live in the home a priority period to make offers before investors, which can mean less competition for first-time and move-up buyers. How each program works, how to read REO listings and what to check on a showing are covered in how to find and tour bank-owned homes.

Bank-owned homes are the last stage of the foreclosure process. Here is how buying one compares with buying at the earlier stages.

In short, REO trades some of the discount you might find at an auction for much lower risk and a more familiar buying process.

Nearly every REO property is sold as-is. The lender has usually never lived in the home and knows little about its history, so it typically will not make repairs or provide the detailed disclosures a homeowner would. In many states, lenders selling foreclosed property are exempt from some seller disclosure requirements, though rules vary.

Condition ranges widely. Some REO homes need only cleaning and paint. Others have problems such as:

• Deferred maintenance from owners who could not afford upkeep.
• Damage from the move-out, vandalism or theft of copper, appliances or fixtures.
• Water damage, mold or frozen pipes from a home left vacant without heat.
• Utilities shut off, so systems cannot be tested without permission to turn them on.
• Code violations, open permits or unpermitted work.

As-is limits what the seller will fix, not your right to look. How to use the inspection period and what banks will negotiate are covered in inspecting and negotiating on REO properties.

One of the main advantages of buying REO is cleaner title. The foreclosure generally eliminated junior liens, and before selling, the lender usually pays or resolves remaining issues such as back property taxes or HOA dues so it can deliver insurable title.

That does not remove every risk:

• Problems in the foreclosure itself, such as a party who was not properly notified, can surface later. An owner's title insurance policy is your main protection.
• Lenders commonly convey with a special warranty deed, which promises less than a homeowner's deed typically would.
• In states where a former owner has a right of redemption after the foreclosure sale, the lender usually waits for it to end before selling, but confirm that it has.
• Open code violations and municipal liens may not be cleared and can transfer to you.

How to review the title commitment and what the deed means for you at closing are covered in closing on a bank-owned home.

Advantages

• A standard listing and offer process, usually with a buyer's agent.
• Financing is typically allowed, including conventional, FHA and renovation loans if the home qualifies.
• An inspection period and title insurance.
• The home is usually vacant, so there is no possession process for you to handle.
• Prices that reflect condition, which can mean value for buyers willing to do work.

Drawbacks

• As-is condition and limited disclosures.
• Bank addenda that override parts of your contract and favor the seller.
• Slow responses, since offers may need approval from several parties.
• Competition from investors and other buyers on well-priced homes.
• Repairs may be needed before some lenders will finance the home.

Whether the trade-offs work for you depends on your budget, your tolerance for repairs and how quickly you need to move. Buyers with cash or renovation financing are often in the strongest position.

For most first-time buyers, REO is the most practical way into distressed property. To get started, see how to buy a bank-owned home.