REO properties are usually sold below market value and most of them, in perfect condition. But like all investment opportunities, you can very easily get burnt if you don’t know what you are doing.
We have put together this guide to give you in-depth knowledge on the REO industry and we have answered a lot of the most common REO property questions in our FAQ section at the end of this article. We also have a downloadable list of 41 REO Bank Websites.
In this Guide:
What is an REO Property?
This isn’t a lender or financial institution’s main line of business, at least it isn’t supposed to be.
These are assets acquired because things didn’t go as planned. Especially for the borrowers that lost them.
So an REO property can be a home, condo, office building, strip mall, or construction project that is now owned by a lender.
These lenders and banks need to liquidate their REO property. They need to recoup the capital they loaned so they can make new loans with that cash.
For home buyers, and residential and commercial real estate investors, REO property can be very desirable. They are frequently sought out for big discounts and as value investments.
So how do properties leap from performing to REO status? How can buyers find REO property for sale, and even free REO listings? How can REOs be bought from banks? And how do these types of properties stack up against other options in the marketplace?
How Does REO Repossession Work?
Property becomes REO property after going through the foreclosure process. This process can be cut short if the borrower can reinstate their loan in time. Or if they can refinance their loan, sell the property (often as a short sale), come to a loan modification agreement, or hand over ownership voluntarily via a deed-in-lieu of foreclosure.
There can be a wide variety of causes for a default that triggers foreclosure including:
- Failing to maintain monthly mortgage payments
- Inability to satisfy maturing balloon loan payments
- Defaulting on loan provisions such as taxes and insurance
Triggering acceleration clauses
- Defaulting on condo or home owner association dues
- Issues which threaten property ownership
Residential REO Repossession
What is an REO home or condo?
An REO property is one which has been through the foreclosure process.
The Bank Repo Process:
- Borrower defaults on the loan
- Lender notifies the borrower of the breach of contract and notifies of remedial option
- Legal documents are filed to begin the foreclosure process
- The property goes to foreclosure auction
- If unsold or the bank is the highest bidder property is repossessed and becomes REO
What makes this process confusing for many is that different US states are divided between two very different legal processes for forcing auctions and repossessing real estate. Some states even offer both options. This is the judicial and non-judicial foreclosure process.
Commercial REO Repossession
The commercial REO property repossession is normally much simpler. This includes mortgage loans on raw and vacant land and lots, construction projects, office buildings, retail and mixed use properties, industrial property and warehouses, and multifamily apartment buildings.
Commercial mortgage loans and repossessions are not subject to the same regulations as for residential and owner occupied home loans. This makes it a far faster process for lenders. It is more akin to the non-judicial process, or repossessing business equipment, or vehicles.
REO vs Foreclosure
A foreclosure is the process through which a bank or a lender attempts to collect on a debt secured by real estate.
Foreclosure typically begins with a notice of default, this where the lender fails to pay of the mortgage on the property. Banks refer to these kind of mortgages as non-performing loans
The actual foreclosure is always handled by an attorney and it culminates in a foreclosure auction. At the foreclosure auction the lender may elect to make what’s called a credit bid wherein they will bid up to the amount that they are owed on the property and if there is no higher bidder then that bid will secure the property in the sale back to the lender. This is what is typically referred to as booking the property in.
It’s common in the industry for people to refer to REOs, which is an acronym for real estate owned which is shortened from the bank’s balance sheet line item which is OREO or other real estate owned, as simply foreclosures. The REO line item refers to properties acquired through the foreclosure process that now are on a lender’s books.
When you’re buying a property that is REO you’re purchasing real estate from a seller which is the bank. The process for which is very similar to buying any real estate from any seller and it’s covered elsewhere in this guide. When you are buying at a foreclosure auction the process is completely different and varies from state-to-state.
Buying at a foreclosure auction
In some states and with some auctioneers you will typically bid at the auction with some earnest money deposited, usually on a residential property. You could expect to deposit $5,000 to $10,000 sometimes less. Sometimes the deposit is tied to the property value and is a percentage in the 5 to 10% range.
In a foreclosure proceeding and then purchasing through auction the bank does not get into what’s called the chain of title. That means that the bank never owns the property they only own the paper, the note. Through the rights provided to them in the note they have the power to foreclose which is the act of selling the property through or foreclosure auction either back to themselves or to a third party.
When you were buying property at a foreclosure auction you must understand that if you are the highest bidder the deposit that you leave that day is at risk that means that if you are unable to close, your deposit will be liquidated. You should also understand that when you buy a foreclosure auction you are generally buying as is, meaning, there are no warranties or representations of any kind with the exception of clean title.
You will not be able to get a mortgage contingency for the purchase of a foreclosure at auction. This doesn’t mean that you can’t finance the property it just means that your purchase will not be subject to any financing. If you’re not confident that you can have the money to close beyond the shadow of a doubt by the closing date then you should not bid. In some states you must bid and close in the same day.
Foreclosure Pros & Cons
- You will likely be able to pay less for the property at the foreclosure auction than at any other time
- It’s fun and exciting to bid at foreclosure auctions
- You will not be able to have a financing contingency.
- You must have cash 4 the binder in order to be able to bid
- You will not be able to inspect the property prior to bidding
- You will have to close on the lender’s own timeline and terms you will not be able to have any influence or input into the terms of the sale they are dictated by the foreclosing parties legal counsel and the state in which the foreclosure is happening
Why of buy an REO
- An REO sale is much the same as any real estate transaction there are no special rules that you have to know
- You will likely pay less for an REO then you will when you buy property from private seller
- You will not have the pressure that you will have at a foreclosure auction and you will not have to deal with the competitive bidding
- In certain cases you will be able to negotiate that the lender who owns the REO should Finance your acquisition
- You will not be able to dictate terms generally
- You will pay more generally than you would have at auction (but not always)
How to Find REO Homes
Your business will die or flourish solely on your ability to find good deals.
An often overlooked but very important key to REO success is consistency, one-off deals don’t make for a stable business you will need a steady flow of leads.
Going direct to banks or credit unions is the best way to get constant REO deals and it removes the competition found on public listings.
There are many sources for distressed REO property, including:
- Credit unions
- REO brokers
- REO Realtors
- Real estate investment firms
- Hedge funds
- Federal, national, and local government
- Fannie Mae Homepath REO
- HUD homes
How to Find Free REO Property & Foreclosure Listings
Distressed property can be purchased at any stage in the process; from before the foreclosure process starts in earnest, through being repossessed and becoming a REO property.
There are even channels for obtaining free bank REO property and foreclosure listings, and marketing to reach distressed and highly motivated sellers prior to entering the foreclosure process.
- Realtors with REO listings
- Pre-foreclosure and short sale listings on the MLS
- Knocking on doors
- Public records
- Local newspapers
- Foreclosure auctions
- Tax sales and auctions
- Direct mail prospecting
- Real estate websites
- Local bank branches
While some of the above sources of free REO property listings may work for home buyers searching for individual homes and condos at discount prices; they are not always the most efficient and cost effective for real estate investors or investment firms seeking volume business or bulk REO packages.
For the serious investor, investment firm, and real estate agents seeking REO property listings, it is necessary to look to resources with larger pools of properties, better deal flow, and tools which help them quickly navigate the information.
This not only means seeking out lender owned property, but having comprehensive and agile software like BankProspector to evaluate and connect with opportunities.
We have created an overview of where, how, and why to source bank owned property with our 8 page guide to bank owned property
How to Know Which Banks Have REO Property
As the financial and mortgage crisis hit bottom around 2008 it is unlikely there wasn’t a single bank or mortgage lender without REO property on their books.
There are still thousands of banks with non-performing loans, distressed debt, and REO property. However, many aren’t publicly listing this inventory. Many may not even be actively selling it.
How can buyers and investors avoid months of wasted time and thousands of dollars chasing the wrong financial institutions? How do you know which banks have foreclosure properties, and which have REO property for sale?
How Do Banks Decide To Sell REO Property?
Not all banks are actively marketing and advertising REO property for sale. Some aren’t even processing foreclosures on mortgage loans that defaulted years ago. Others simply are not selling.
There can be a variety of reasons for this including:
- Accounting limitations
- Lack of resources
- Reducing liability in holding more distressed assets
- Waiting for property values to improve
- Lack of a system and channel for selling REOs
- You haven’t asked them yet
Free Foreclosure Listings
Fortunately BankProspector makes it easy to identify banks with REOs and selling signals for knowing which can and will sell their distressed property inventory.
How to Get REO Property Listings from Banks
REO property listings can be highly profitable listings for real estate agents and their brokerages. With bank REO property being so highly desirable among consumers, they can sell quickly and easily.
If good relationships can be established and REO brokers perform, they can benefit from high volumes of deal flow, with less effort and expense in obtaining listings than their competitors.
On the consumer sales side; becoming the go-to resource for discounted REO property deals, and being recognized as the REO specialist in the area can carry many advantages.
If you would like to become an REO agent, we have created a great guide on how to get REO Listings
41 Bank REO Websites
Buying REO Property
Buying REO property direct isn’t that different from other properties, but it can have its quirks and challenges.
It is well worth the effort for the substantial discounts and deals available, but buyers need to know the differences and how to navigate the process.
The Ten Step Process of Buying REO Property from Banks:
- Get pre-qualified and line up financing
- Identify the banks with REO property, obtain bank REO list(s)
- Hone in on the institutions that are selling REOs
- Get in touch with the decision makers that can sell
- Make an offer to purchase
- Negotiate and finalize the terms
- Secure the final signed purchase contract
- Complete your due diligence inspections
- Sign the final closing documents and ensure funds are wired
- Secure your new property
Negotiate Buying Individual and Bulk REO
Negotiating REO property can be both easier and more frustrating than conventional property acquisitions. Those buyers dealing with internal REO service and loss mitigation departments can find the paperwork and phone hold times irritating. But it is often ‘simplified’ by the banks rules.
They normally have set parameters and processes. And low level reps really don’t have any power to deviate from them. This can sometimes result in seemingly absurd and unfair demands such as forgoing inspections.
However, those that are able to connect with bank managers, executives, and other real decisions makers can find a lot more room to negotiate. Obviously, it should go without saying that if you are buying bulk REO packages in the millions of dollars range, or a very sizable commercial property asset; you’ll also have a little more negotiating power than the average consumer just looking for a deal on a single cheap bank owned home.
Expect to purchase properties in as-is condition, to provide proof of funds or financing approval in advance, and to have to use the lender’s choice of contract. Buyers may have to be willing to take on slightly more risk than they normally would shoot for. But if you are buying at the right price that should be built into the equation.
Construction REO Property
One of the most commonly overlooked and underestimated types of REO properties are construction REOs. These are properties which were collateral for construction loans. They can prevent obvious challenges depending on the stage in which they defaulted and their current condition. But they could offer one of the best pools of discounted properties, with the least competition, and most motivated sellers for some real estate investors and buyers.
How does an REO sale work?
1. Agree terms
One of the differences that you’re going to see when you’re buying REO is that the terms won’t be as flexible as they are when you’re dealing with a private seller.
An asset manager, workout officer or REO manager only has so much leeway in their decision-making.
Any term changes typically would have to go through the asset managers own legal counsel and so they are not generally authorized to make changes to the contract themselves.
An REO manager will have guidelines within which variables to accept or rejected deal or even counter, but what you will find for the most part is that lenders like few contingencies and closings that are assured.
It is possible for a lender to finance the sale of their REO. If they do, it will be done through the origination of a new loan just like any other loan. You should expect, if you’re going to make an offer to purchase REO from a bank, that you will make an offer and submit that offer with a binder which is also referred to as an earnest money deposit.
You may have to increase that binder depending on your locale when you sign a purchase and sale and then you’ll be expected to close. Closing terms or timelines aren’t rigid but 30 and at a maximum 60 days is what you can expect a bank to accept. The fewer contingencies you have in the more likely you appear to be too close or to be able to close the more likely it is that you’ll get the deal.
2. Make an offer
When you make an offer to purchase REO, if you would normally use an offer to purchase, then use that. If you would normally use a purchase-and-sale then use that and if you are buying in bulk or buying commercial and you would normally use an LOI then use the LOI. There are no hard rules on how you are to make your offer.
However, when you are making an offer to buy REO from a bank, remember that first and foremost, the bank will want to know that you are a serious buyer who can close and who won’t waste their time. The way that you typically will Express this is by putting down a binder or an earnest money to that is appropriate for the purchase price of the REO.
Closing an REO sale isn’t any different than closing on any other sale. Oftentimes we will get asked questions like, can you finance the purchase of an REO or can you get a mortgage when you buy an REO and the answer is always the same, it depends.
Some REOs aren’t financeable and if you try to include a mortgage contingency the bank won’t accept it some lenders are happy to finance their own REO sales although they probably won’t offer you this option, so you should ask.
In some states you’ll use a title company and others will use an attorney. In the end, the closing process for buying an REO from a bank is going to be nearly identical to that of doing a deal with the private seller. The exception being that the seller will have less flexibility unless direct input on the terms and contract will have already been agreed on by legal counsel.
How Much Should I Offer for Bank Owned REOs?
This is the million dollar question everyone wants to know. People and businesses are specifically drawn to REO property for their significant perceived discounts.
If they weren’t on sale, and didn’t offer great value or profit potential they wouldn’t be so sought after. And they’d be a lot easier to purchase for the general public.
Non-performing loan notes and REO property have often sold for pennies on the dollar. It’s also true that as the market improves, as distressed property inventory dwindles, and as lenders become more bullish and optimistic about the values of these properties – the more they will demand, and more difficult they will be in negotiating them.
There may continue to be a vast vault of REOs and foreclosure properties flowing onto the market for several more years. But this is definitely the window of opportunity for securing better deals.
If you go in too low on your offer, you may risk not being taken seriously, and burning your bridges. At the same time – no one wants to overpay and feel foolish later. So do your math. Figure out what makes sense. And where your cut off point is.
Make an offer that has a great chance of being accepted, and provides value to you. Expect the bank to counteroffer. Build that room into your offer, unless you know that there is competition, and you only have one shot.
Quick tips for making a great offer:
- Make sure your offer is presented in the way the bank wants it
- Include your proof of funds or mortgage approval letter
- Keep contingencies and special clauses to a minimum
- Include a net sheet showing the seller exactly what they’ll pocket
- Highlight how secure, and low risk your offer is
- Document your reasons for offering less with real facts
- Don’t be bullied into overpaying
Closing Costs for Buying REO Property
Closing and settlement costs for purchasing and selling REO property are pretty much the same as for all other similar real estate transactions.
Common closing costs involved include:
- Appraisals, AVMs, or BPOs
- Property inspections and environmental studies
- Surveys and flood elevation certificates
- Loan origination and mortgage underwriting fees
- Prepaid interest on new loans
- Title searches, insurance, and closer fees
- Escrow and money wiring fees
- Government recording fees
- Property insurance
- Condo and HOA dues and special assessments
- County property taxes
Where closing costs can be controversial when purchasing bank REO property is that lenders will often attempt to defer many costs traditionally paid by the seller, to the buyer. This can be negotiable, and factored into the overall purchase price and terms.
Do watch out for lender-sellers demanding their choice of all third party vendors. This can lead to increased costs, and it can also be illegal. Although some sellers have been blatantly breaking these laws flagrantly, even in public listings on the MLS.
Financing for REO Property
Individual home buyers and investment firms purchasing bulk REO property packages can finance their acquisitions. And there are more and more mortgage lenders and financiers aggressively seeking to put their money to work in the market.
There are both multiple sources of financing for REO property, and different types of loans. Find the right fit you’re your investment strategy or buying purpose.
5 Mortgage Lenders Financing Distressed Property:
Note: The lender you are purchasing from may offer financing too. Just ask.
Check out the new book on: Attracting Private Money
Types of Loans and Funding for Buying REO Property
- Buy to rent loans and blanket mortgages
- Transactional funding
- Construction loans
- Private money mortgages
- Bridge and home equity loans on existing properties
- Business loans
- Hard money loans
- Conventional and government backed home loans
- Fannie Mae and Freddie Mac multifamily apartment loans
- Fixed and adjustable rate mortgages
- Lines of credit
REO Property Management
Management of REO property is critical. Everyone has heard about how banks have left thousands of homes uncared for across the nation. They haven’t maintained them. They haven’t paid property taxes on them. They haven’t maintained landscaping and curb appeal, or kept them secure.
This has been a blight on many neighborhoods. While rehabbers and other real estate investors have stepped in to fix the situation and save neighborhoods this can’t be overlooked.
Local authorities have even been tearing down thousands of these properties because of this. That does NOT mean that all REOs are in bad shape. In fact; there are quite likely still many newer homes and condo buildings, and even brand new properties that have never been lived in yet among bank REOs. But you do need to know what you are getting.
With this in mind real estate investors need to immediately get their property management teams in the door, and even recruit the help of local REO property preservation companies. These properties need to be thoroughly inspected, secured, cleaned up, and brought up to code.
Failure to do this can not only result in code enforcement fines and liens which can prevent resale, but can led to them being condemned and bulldozed as well.
FAQs about buying REO properties
Can I get a mortgage on a foreclosed home?
Whether or not you can get a mortgage on a foreclosed home depends on a couple of things. First off if you are bidding on a foreclosure at an auction you should be aware that your purchase will not be contingent upon you being approved for a mortgage and so I recommend that if you are going to bid on foreclosures at the foreclosure auctions that you have guaranteed financing in place and never expect a contingency.
Some foreclosed homes cannot have mortgages due to their condition. A typical mortgage will not allow you to buy a property, for example, missing the plumbing or essential appliances like the stove. If a foreclosed home meet lender guidelines and you’re not buying it at the auction but rather as REO then there’s no reason why you wouldn’t be able to get a mortgage to buy the foreclosure.
Can you rent to own an REO foreclosure?
Most banks are not doing rent to own schemes. Some large private Equity or hedge funds are doing rent-to-own schemes and in fact have pools of REOs but generally speaking, you will not find Banks offering rent to own plans for their REOs or foreclosures.
How long does it take for a foreclosed home to go on the market?
How long a foreclosed home takes to get to market depends on a number of things, not the least of which are who the special servicer or REO asset manager is, what the condition of the home is and other considerations.
It’s not uncommon to see at least 45 to 60 day wait. But there is no standard nor rule of thumb for determining how long it takes for an REO to come to Market.
Do banks pay REO closing costs?
Banks do not generally pay closing costs on the sale of their REO’s.
How long does the REO sale take?
The are not longer or shorter than any other real estate sale.
Can I buy REO with a FHA loan?
There are no specific restrictions however, it is important that the property and the borrower fit in all of the FHA lending boxes.
Do banks negotiate on REO prices?
Banks will negotiate on REO prices just like any other seller will. Remember that the most important thing, typically, for a lender is that they know that you will close. The fewer contingencies that you have the faster the closes the more likely and more secure a seller you are, the more likely you are to be able to get a deal from the bank. But yes thanks absolutely positively do negotiate on REO prices.
In what condition are REO homes?
REO homes come in a variety of conditions. I’ve seen everything from pre-construction, to beautifully finished, to completely demolished. There is no Rhyme or Reason to it.
Who do I contact for REO?
If you want to buy REO direct from the bank then you should be working with your local, regional and community banks and seeking out the area manager, real estate manager, or special assets manager, depending on how the bank is structured.
If you are looking at foreclosure listing websites and the MLS, then you’ll have to be content with dealing with the REO agent. If you are contacting Banks directly for REO, the first thing you need to do is make sure that you understand whether or not the bank has any REO and then determining who the correct person is to contact, these are things that we cover in our training.