Tips For Negotiating With REO Property Sellers

Quick tips on how to get the best deal when buying a Real Estate Owned house.

authorWritten by Victor Bemporad and author Reviewed by Peter RanckFeb 27, 2024
Two people negotiating a sale
Two people negotiating a sale

Real Estate Owned properties – also known as REOs – are foreclosed, lender-owned properties that failed to be sold at auction.

Properties become REO in three steps. First, a homeowner falls behind their mortgage payments and the house is foreclosed. The bank or lender repossesses the home and tries to sell it at an auction. The property fails to be sold at auction – this can happen if there’s no demand or if no one offers close to the asking price. Banks don’t want these properties – they’d rather move that money into more profitable investments. For that reason, REO is usually sold at a discount and can be an excellent option to buy your first home.

How To Find The Perfect REO

Browse Online Listings

If you’re looking for a property, the first step is to check our online REO listings. REOs are the result of failed auctions. This is how the process goes: first, a homeowner falls behind on their mortgage payments. The bank forecloses the property and repossesses the home; then, it tries to sell it at an auction to recoup its investment.  If no buyer appears, the bank is forced to keep the property – almost against their will, as they’d much prefer to reinvest that money elsewhere.

Foreclosures and REOs particularly can be the best place to find cheap homes, but where can you start looking? A good place to start is with foreclosures. Information about foreclosures in your area is part of the public record, accessible from your county’s office. Alternatively, you can check out:

  • Online listing services
  • Local real estate agents
  • Printed publications like newspapers
  • Online sites of bank-owned properties
  • Specialized foreclosure and REO websites

From the public records and online listings, you’ll know which properties are – and which properties aren’t – sold at auctions and which foreclosures are likely to become REOs. The next step is to narrow down your search.

Narrow Down Your Search

After you have a list of properties likely to become REOs, it’s time to narrow down your search. If you use an online listing platform, this process can be very quick. Online listing platforms use advanced filters like:

  • Listing price
  • Location and community resources
  • Repairs needed
  • Quality of the neighborhood
  • Requirements and lender-specific contingencies

If you reach out to a local real estate agent to look up REOs for you, he’ll take care of checking online listings and other resources. After this step, you should have a list of properties that match what you’re looking for.

Contact A Real Estate Buyer’s Agent

If you haven’t contacted an agent, now is the time. A buyer’s agent can help you navigate the buying process and make sure you find the best properties. Some REO agents work for several banks, while others specialize in a type of listing. No matter their focus, an REO agent will have an excellent idea about the costs of potential repairs and fixes and can help you make the best decision.

Find a buyer’s agent specializing in the property type you’re looking for, and check their credentials. How many deals have they closed in the last couple of months? What percentage over – or below – the asking price did properties end up selling for? That will give you an idea of where the market is, how much you should offer, and if it’s the best time to purchase a property.

Offer A Quick Closing

Banks looking to sell REOs are likely desperate to sell the property after failing to sell it at auction.  Banks are more likely to accept lower offers if that means selling the property immediately and offloading that risky investment. For that reason, REO properties come at a hefty discount. If you have an all-cash offer or a pre-approval letter for a loan, you’ll have much leverage – but make sure you don’t overspend. If there are no other offers on the table, it’s a good strategy to start with a bid well below the listed price – especially if the property has been in a long time in the market.

According to Ellie Mae Inc. – one of the largest real estate software in the US, processing more than one-third of all mortgage applications –closing on a house can take 30 to 50 days under normal circumstances.  If you have already secured financing for the house or have an all-cash offer, cutting down this time frame will give you excellent chances to secure the property.

Shorten The Inspection

Although we don’t recommend skipping on a home inspection altogether, there are steps you can take to shorten it – or legal contingencies you can take. Focus on what’s important.  Things like foundation cracks, leaks in the roof, or problems with water heating, electricity, or mechanical systems – as well as HVAC systems – should be your priority. Things like loose faucets, cabinet damage, or broken windows are all replaceable and shouldn’t get in the way of a good deal.

Let your home inspector know what to focus on so you can move along the inspection as quickly as possible. Scheduling a home inspection can take 1-2 weeks, depending on availability in your area. Try to find out if there are other potential buyers and what their schedule looks like so you can beat them to the punch and make an offer before they do.

Make Your Offer Memorable

Banks often have to go through hundreds of offers on all their REOs. If you can make your offer stand out from the rest, you will have an edge over the other potential buyers. Some of the things you can do to make your offer stand out include:

  • Offer to split the fees with the bank
  • Come with a pre-approval letter
  • Ask about the number of bids they’ve received

Some of the fees that may come up during a sale include title insurance, transfer fees, and escrow fees. The bank may take your offer more seriously if they think you’re interested enough to offer to split the costs. If you’re purchasing the property with financing from a lender, come to the table with a pre-approval letter. You may also want to consider lenders that also list REO properties, so you can streamline the process. Finally, asking about the number of offers they’ve received can establish you as a serious contender.


Is It A Good Idea To Buy A REO?

Yes – buying REO properties can be an excellent investment and completely worth it in the long run. Keep in mind that no matter if you’re a home buyer looking for a primary home or a real estate investor: REOs aren’t usually move-in ready, and you will need to make a considerable investment.

Why Is A Foreclosure More Likely To Have Title Issues Than A Non-Foreclosure?

A foreclosure means that the former owner defaulted on their mortgage payments. Borrowers who can’t afford their mortgage payments are more likely to have taken loans against the property. These loans are tied to the property – not the owner.  For that reason, the first investment you should consider when buying a foreclosure is title insurance. A title search will reveal any liens or claims on the property – some that even the former owner may be unaware of.

What Does Real Estate Owned Mean On A Financial Statement?

Real Estate Owned (REO) are bank-owned, foreclosed properties listed on auctions but have yet to find a buyer. As banks try to recoup their losses and eliminate a risky investment, REOs are usually sold well below their market value.

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