REO Properties 101: How To Find & Buy Bank-Owned Homes

Real estate-owned properties, commonly known as REOs, are often listed below market value, allowing investors to earn impressive returns.

But why is every investor not dealing REO properties for sale? Because they don't sit around waiting to be snapped. These residential or commercial properties are the hidden gems of real estate investing; they are scarce, off the market, and only accessible to investors who know how to find and buy them.

Thankfully, this guide aims to turn you into one of these savvy real estate investors. We will explore what REO properties are, why they're such a fantastic investment option, and even potential risks, giving you the upper hand in finding and acquiring them.

• What Is A REO Property?
• How Do REO Foreclosures Work?
• How Does The Foreclosure Process Work?
• Why Bank REO Properties Are A Smart Investment Choice
• The Risks Of Buying REO Properties
• REO Properties Vs. Foreclosed Homes
• How To Find REO Properties For Sale
• How Do You Buy An REO Foreclosure?
• How To Buy REO (Real Estate Owned) Homes From Banks
• How Do Banks Sell Real Estate Owned Properties?
• How To Finance An REO Property
• How Much Should I Offer For An REO Property?
• How To Find Bank-Owned Properties on the MLS
• How To Find REO Agents Selling Foreclosed Houses
• How To Find REO Properties For Free
• How To Buy Bulk REO Properties From Banks
• What Banks Have REO Properties For Sale?
• Expert Tips For Buying REO Properties
• Can You Wholesale REO Properties?
• Can You Flip REO Properties As An Investor?
• What’s The Difference Between REO And Short Sale?
• The Bottom Line: What To Know About REO Properties

What Is A REO Property?

A REO property is a repossessed property that didn't sell at a foreclosure auction. It's also known as a bank-owned property because its ownership reverts to the lender.

So, how does a property become REO? When a homeowner repeatedly misses mortgage payments, the lender initiates foreclosure.

This process usually starts with the pre-foreclosure phase, when the lender issues the borrower a notice of default. During this period, generally lasting 90 days, the homeowner gets the grace to remedy the situation by whichever means possible. For example, they can even sell the property to raise the funds needed to repay their mortgage.

If the homeowner fails to bring their mortgage to current in pre-foreclosure, the lender issues a notice of sale, marking official foreclosure. The property is then repossessed and auctioned, often at a local courthouse. When the bids at the auction don't meet the lender's minimum, the property becomes REO, meaning it's now wholly owned by the bank and can be listed for sale in the open market.

Note that while this is the official way homes become property REO, sometimes homeowners will voluntarily give up the property to the lender through a deed in lieu of foreclosure. They do this to avoid foreclosure. Such properties instantly become REOs. Read on to discover how to find REO properties.

How Do REO Foreclosures Work?

You should know several things to understand how REO foreclosures work.

Banks and lenders are not in the business of buying, fixing, and flipping properties—their business is collecting interest on debt used by borrowers to purchase real estate investments.

When a borrower isn't making payments, the bank isn't making money on its debt investment. So, it " forecloses" on the property to recapture its investment and turn it into a profitable loan yet again. 

REO foreclosures work differently depending on the state in which the property is located.

In some states, the lender must file an action in state court, essentially getting permission from the court, to begin the foreclosure process.

This is called Judicial Foreclosure, and those states are often called "Judicial States."

Judicial foreclosure benefits the borrower by requiring the lender to present their case for foreclosure in an open forum. This allows the borrower more time to stay in their home and keep current on payments. 

The rest of the states ("Non-Judicial States") do not require a lender to demonstrate in court that the foreclosure requirements have been met.

Rather, the borrower is supposed to file a suit to claim that the lender did not meet those requirements. 

Here's a link to a complete list of all U.S. states that have judicial and non-judicial foreclosures. 

Once the property is foreclosed on, the lender will clear any tax arrears and liens on it before putting it up for sale.

The best way to make a better offer on listed REO foreclosures is to seek the help of real estate agents with experience in buying and selling these kinds of properties.

After making the offer, both parties will negotiate prices and contingencies, including appraisal and inspections.

An appraisal is essential in ensuring that the property's value complements the loan that the bank is offering for the completion of the deal.

Inspection contingencies allow the buyer to back out if the REO property's repairs are too extensive to make it a profitable investment. 

How Does The Foreclosure Process Work?

The foreclosure process is quite simple but requires you to be very keen to get the best deal.

The following is a description of how the process of foreclosure works:

Default

A foreclosure can only occur when a home or property owner cannot repay the principal or interest on their mortgage loan.

However, they will first give the homeowners a grace period of about thirty days and various alternatives to avoid foreclosure.

During this period, the homeowner can request the lender to adjust the loan payments, interests, and other elements. You may also want to consider signing up for foreclosure avoidance counseling.

Besides, selling the property to pay the mortgage could also be worth considering. However, sellers should consult with a real estate professional first.

Notice of Default

If the borrower cannot repay the mortgage within the grace period, the lender will issue a Notice of Default ("NOD"). The notice is mailed to the property owner with a certified letter, giving him or her 90 days to clear the recent bills.

That is when the foreclosure process formally begins. One of the options for avoiding foreclosure is mortgage reinstatement, which requires you to make all the defaulted payments, including interest and other fees stipulated by the lender, at once.

Here's a sample of how a notice of default letter starts:

Notice of Sale

If, after 90 days, the homeowner is unable to fix the default, the lender will give a Notice of Sale. The notice will show that the trustee is scheduled to auction the property within the next 21 days.

The lender will send the notice of sale to the homeowner as well as publish it on the local newspapers for three weeks before the set auction date. However, the homeowners can still reinstate the mortgage until five days to the auction.

Auction

The trustee will sell the property to the highest bidder at a public auction. The bidder must immediately pay the bid price, preferably within 24 hours of a sale.

You will then, receive title to the property from the trustee as the new official owner of the property. In case the home is still occupied at the time of sale, you should give the occupants a three-day written notice to vacate the premises.

If the lender fails to sell the property at a public auction, as discussed above, the home becomes what is known as REO properties.

That means the lender will take possession of the property after foreclosure. Find out more about the foreclosure process here.

Why Bank REO Properties Are A Smart Investment Choice

Now that you know what REO properties are, why should you consider adding them to your investment portfolio? Because they offer investors a range of unique benefits, including:

• Discounted prices: REOs are generally a nightmare for banks. For a property to be REO, not only does the lender have to shoulder the foreclosure process costs, but they're also yet to recover the money lent to its original owner. Additionally, these properties still accrue taxes, utility bills, and maintenance-related expenses, all of which are on the lender's books. To minimize further losses and ongoing asset management costs, banks often aim to sell REOs quickly and usually list them at discounted rates to attract buyers promptly.
• Higher potential for returns: Because the listing price is usually below market value, investing in REO bank-owned properties, whether for wholesaling, house flipping, or renting, offers a potentially larger profit margin, translating to higher ROI.
• Fewer title discrepancies: Since they're eager to sell, banks typically resolve any issues that could delay the sale or deter buyers from purchasing REO listings beforehand. This usually includes clearing title-related concerns, such as tax arrears and liens. Consequently, investing in an REO means purchasing a claim-free property title, ensuring a smooth-sailing re-investment process.
• Lenders are willing to negotiate: Banks are often open to negotiating the terms of the sale due to their urgency to sell. For example, besides the sale price, some lenders negotiate closing costs or even reimburse some of the renovation expenses.
• No homeowners involved: Most homeowners have sentimental attachments to their properties, which can complicate the purchase process. However, with REO-owned properties, the homeowner is no longer part of the picture, making the transaction smoother as lenders typically have no emotional ties to the home.

The Risks Of Buying REO Properties

There's nothing like a perfect investment, and REO homes for sale are no exception. Investing in them comes with risks like:

• Competition: Because they're sold below market value and tend to have clear titles, REO listings attract many buyers, ranging from investors and landlords to even first-time homebuyers. Their limited availability and listings on public marketplaces like the MLS, Zillow, and other publicly accessible platforms further intensify competition, making it quite a sport to secure them.
• As-Is Status: Homeowners unable to repay a mortgage are often also unable to handle maintenance costs, leaving most REOs in poor condition. Unfortunately, once a home is in REO, the bank lists it as an as-is REO property, placing the burden of renovations and maintenance on the buyer.
• Unique Multi-Family Issues: Multi-family REOs are subject to the Protecting Tenants at Foreclosure Act (PTFA). This act allows tenants to remain in the property until the end of the lease unless the purchase intends to occupy the property as a primary residence or if the lease is monthly or terminable at will. Consequently, most multi-family REOs are usually tenant-occupied at purchase, meaning investors acquiring them cannot evict the occupants, which delays re-investment. A REO-occupied property also forces investors to landlords, and even then, they cannot increase rent or change any terms until the lease expires.
• High Repair Costs: Since REO properties are sold as-is, some may come with extensive repairs and renovation requirements that, if not carefully managed, can nibble away at your profit margin.

REO Properties Vs. Foreclosed Homes

While often used interchangeably, REO properties and foreclosed homes are entirely different. Foreclosed properties are homes that have just been repossessed by the lender and are slated for auction. At this point, the bank cannot claim ownership. In contrast, REO properties are those homes that fail to sell at an auction. At this point, the bank can claim full ownership and even list the property on the open market.

Also note that foreclosure properties are often sold as "sight unseen," meaning buyers cannot perform a home inspection until after the auction. Additionally, foreclosures tend to have title issues. For REOs, buyers can inspect the property before finalizing the purchase. Moreover, REO property listings will rarely have title issues since banks tend to perform a title search before listing to ensure nothing slows down the sale.

How To Find REO Properties For Sale

The most convenient way of finding REO properties for sale is through the Internet.

The following are the key places where you should look to find REO foreclosures to buy:

Online Real Estate Owned Directories

REO directories and online auction platforms list a wide range of real estate-owned REO properties for sale, from which you can easily choose the desired properties.

From these sites, you have the option of buying properties through an auction, real estate agent or direct bids on the site.

You can also find listings of other properties facing imminent foreclosure.

Examples include:

• Foreclosure.com
• Auction.com
• RealtyTrac

Real Estate Brokers

Real estate brokers' primary responsibility is to help investors find properties for sale. However, they can usually offer property listings with information that is not already in the public domain.

With their experience and skills, they can help you quickly get just the right REO property without much effort.

Besides, they have ready access to Multiple Listing Service for selected areas, thereby offering you a variety of properties to choose from.

You can simply find a real estate broker online, at the local real estate office or ask for recommendations from family and friends.

REO Banks and Government Lenders

Sometimes, banks and government lending institutions list REO homes for sale on their websites. But, they only list their REO properties acquired through foreclosures.

The information about their properties is not as much detailed as those offered by REO directories and real estate brokers. Some listings are accompanied by photos of the properties while others do not.

The REO listings also provide contact details for the real estate agents that can take you on a tour of the property and help with making an offer on the chosen one.

Examples of government lenders include HomePath and HomeSteps. These sites are accessible to all, and interested buyers can easily place bids directly therein.

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How Do You Buy An REO Foreclosure?

Here’s how to proceed with buying an REO foreclosure:

Find a lender and review your financing options

Lenders are often highly motivated to sell REO foreclosure properties, and you should be ready to make an offer when the time comes.

Thus, talk to a mortgage lender and discuss with them about the finances for buying the home.

One way to avoid delays is through obtaining pre-qualification from the lender that owns the property.

That will demonstrate that you are financially stable to buy the home, thereby increasing your chances of getting the deal.

In many instances, the property will not qualify for financing due to its physical condition, so consider using a private money lender or paying in cash. 

Engage a real estate broker with experience in REO

Real estate brokers with experience in REO properties will effectively guide you through all the stages of the buying process, making sure that you get the best properties at the right prices.

A buyer’s real estate agent will help you narrow down the most suitable REO property to buy.

They will also facilitate the process of getting an appraisal on the chosen property to determine its true value.

Make an offer

A professional real estate agent will assist you in determining the best offer that is likely to be accepted by the lender.

When making an offer, you may submit your contract, other relevant documentation, and some money to serve as a deposit.

Most lenders usually require buyers to deposit about 1 to 2% of the purchase price in an escrow account.

Conduct home inspections

A professional should also inspect the property to give you an inventory of the required repair works and upgrades. 

The cost of any expected repairs will be factored into the purchase price.

If the home had been inspected by the lender, you should get a copy of the inspection report.

Negotiate with the lender

Based on the condition of the property, days on the market, and recently sold real estate comps, try to negotiate a reasonable price that the lender can settle on.

Real estate agents come in handy in such situations.

Finalize the financing

The last stages of buying an REO foreclosure involve filling out the necessary paperwork and liaising with the lender to make sure that the mortgage will suit the given offer.

At this stage, you should also verify the title deed.

Close the deal

With all the above in place, you can then, finalize the buying process. The buyer and lender will sign the necessary documents to formally transfer ownership of the property.

If you fail to buy the home by the stipulated date, the lender may charge penalties for the delays.

How To Buy REO (Real Estate Owned) Homes From Banks

The process of buying an REO (Real Estate Owned) home is not very different from that of buying any other kind of property. However, there are a few disparities that you should know.

The following are the key steps on how to buy REO properties from banks:

• Check the available listings of bank-owned property (The most suitable places to browse REO homes for sale by banks include the websites of banks, MLS, and real estate agents)
• Identify the right lender and discuss your options for REO financing
• Consult with a real estate agent with experience in buying property owned by a lender
• Decide on the key features or characteristics of your ideal REO home
• Get a home appraisal and inspections
• Submit your offer with the necessary documents and a down payment
• Negotiate the terms of sale with the bank
• Complete the paperwork for the loan application and verify the title deed
• Make the final payment and sign the homeownership transfer papers

How Do Banks Sell Real Estate Owned Properties?

Banks prefer to sell REO-owned properties in bulk rather than individually to ease administrative and management expenses like marketing and legal fees. This approach cuts costs and helps banks clean up their balance sheets quicker, avoiding ongoing expenses such as taxes, maintenance, and insurance.

Bulk REO sales also allow banks to attract institutional investors such as real estate brokerages because they offer more negotiating room. This creates a win-win situation where the mortgage lender can dispose of these properties quickly while the institutional investors get larger discounts.

However, note that if the market is unfavorable, most banks will rent out REO homes first. This strategy enables them to generate funds to cover holding costs while waiting for better market conditions. Some banks sell them to government agencies like Freddie Mac and the Department of Housing and Urban Development. These agencies sell or rent them to families in unfavorable real estate markets.

How To Finance An REO Property

As mentioned, having financing ready makes your offer even more attractive to banks since it demonstrates your readiness to take the property listings off their books. But what if you're short on capital? Here's how to buy REO properties with no money:

• Conventional Mortgage: If you have a good credit score and stable income, a traditional mortgage is among the best financing options you could use to finance an REO property. It offers flexible repayment periods, usually 15-30-year terms, allowing liquidity. A regular mortgage provides lower interest rates than most real estate investment loans. Additionally, banks are generally familiar with conventional mortgages, which makes your offer more attractive.
• FHA Loan: You should consider a FHA loan if your credit isn't good. FHA loans are government-backed loans usually designed for borrowers with low credit scores. Additionally, they require a lower down payment minimum and are insured by the government agency, making lenders more likely to accept your offer. The downside is they have lower limits and, as such, may not fully cover the cost of purchase.
• Home Equity Loan: If you've built up some decent equity in your primary residence, a home equity loan is an excellent way to finance an REO investment property. Since you're tapping into your equity, this type of loan is usually approved much quicker than other options. It is issued as a lump sum, allowing you to seize REO opportunities quickly. Furthermore, home equity loans often feature a fixed interest rate, simplifying repayment budgeting.
• Renovation Loan: if you intend to flip the REO property, a renovation loan is among your best financing options. It's usually issued by government agencies like Fannie Mae and FHA and covers purchasing and renovation expenses. Issuers may disburse it in installments, allowing you to budget properly for each cent. Renovation loan borrowers are, however, required to have good credit and a stable income. Plus, some lenders may require an appraisal.
• Hard Money Loan: A hard money loan is among your best loan options for financing an REO, especially if you've poor credit. Lenders usually accept low credit and don't need income verification to speed up approval. However, due to the risk they take, hard money loans have high interest rates.
• Private money loan: A loan from your family or friends is also an excellent way to finance an REO. They'll grant you flexible repayment, which may not even require interest.

How Much Should I Offer For An REO Property?

How to buy REO properties involves knowing how to quote a proper offer. That said, note that while banks are usually looking to get REO properties off their books as soon as they can and sell them at discounted rates, that doesn't mean they'll take any lowball offer that comes their way. They first review the offers they've received and choose the highest and best offer among the bids.

Additionally, they rarely accept offers in the first round. Instead, they'll select the pick of the bunch among the bids received and then negotiate with the bidders to try and attain their target dollar amount. That means you must go the extra mile to ensure your offer is among the bids that get to round two. To determine how much you should offer an REO property to ensure your bid is among those that get to round two without going too high, perform a comparative analysis. This step will allow you to quote a price that matches or is around what the bank targets. Also, research the real estate market's overall health and trends to determine how much you should offer.

If your offer makes it to round two, ensure you negotiate to get a good deal. Here are some steps you can take to ensure you strike a good deal:

• Research The Property: REO properties are sold as-is. You can use the property's condition to negotiate a good offer. So, research the property's condition, and if it needs extensive repairs, document these and related costs to justify your offer.
• Offer An Earnest Deposit: Including an earnest deposit as part of your offer proves your commitment to making your offer more attractive to the bank, which is looking to sell as quickly as possible.
• Have Proof Of Funds: Get preapproved and include proof of funds with your offer to demonstrate you're ready to close as quickly as possible, which is what the bank needs.
• Commit To A Short Closing Period: Banks want to close on REO properties as soon as possible. So, get your financing in order, and include in your offer that you want to close within 30 days or less to make it stand out.

How To Find Bank-Owned Properties on the MLS

Lenders often enlist real estate agents and brokerages specializing in foreclosure investing to market REOs on their behalf. These agents or realtors typically list the properties on the Multiple Listing Service, making it one of the best sources for REO leads. So, partner up with a listing agent in your area who specializes in the same to help you find REO-owned property leads on the MLS.

Additionally, join our free MLS training program to enhance your expertise in unearthing profitable REO investments on the platform. Our program covers all aspects of MLS investing, including how to find buyers on the platform once you secure a REO property. So sign up today to master the skills you need to scale your REO investing portfolio to new heights.

How To Find REO Agents Selling Foreclosed Houses

There are a few tricks on how to find REO agents selling foreclosed houses.

One is by simply conducting a Google Search on REO agents in the area where you intend to buy a property. When searching for REO agents online, be sure to also check their reviews.

The local real estate office can also offer referrals for a good REO agent.

Find recently sold REO properties and call the listing agents that sold those properties. 

You may also want to ask around about trusted REO agents selling foreclosed homes.

How To Find REO Properties For Free

Today, there are numerous options for finding REO properties.

REO property listings are posted on various online platforms, which are often free, but some also require small subscription fees.

Nevertheless, here’s how to find REO properties for free:

Bank REO

The websites of bank REO homes are a great platform for those REO home buyers.

The recommended bank REO sites to check out include: 

• Bank of America REO
• CitiMortgage REO
• PNC Financial Services REO

Government REO

Some of the best sites for finding government REO properties include: 

• HomePath
• HUD REO
• HomeSales.gov
• IRS Properties

Real Estate Agents and Property Services providers

You can also find REO foreclosures for free through real estate brokers and property services, including:

• Realtor.com
• Zillow
• Trulia

How To Buy Bulk REO Properties From Banks

Bulk REO properties are generally more profitable than single REO foreclosures.

Banks offer bulk REO properties whenever they have several similar REO properties for sale. To buy the properties, you should first contact the banks offering the packages.

You should also know the decision-makers at the banks who are responsible for the sale of bulk REO properties.

The bank representatives will then, provide a list of the properties with information about their location, market value, appraisal value, and others.

One way to buy bulk bank-owned property is through institutional investors like hedge funds and private equities.

The other alternative is to buy the packages in bulk, choose the property that you need then, sell the remaining at prices that will cover your acquisition fees.

Nevertheless, due diligence is critical to buying bulk REO properties from banks.

What Banks Have REO Properties For Sale?

The following is a list of the national and regional banks offering REOs for sale:

National REO Banks

• HomePath.com
• Bank of America
• CitiMortgage
• Branch Banking & Trust
• Chase Bank

Regional REO Banks

• 1^st National Bank of Scotia
• California Bank & Trust
• Coast and Country
• First Northern Bank
• Virginia Housing Development Authority

You can also find more national and regional REO banks here.

Expert Tips For Buying REO Properties

Here are some tips to help you secure good REO property deals:

• Have A Plan: Don't rush into REO investing without a plan. Not having a plan can result in resource misallocation and losses. So, establish a clear strategy first: determine the types of bank-owned properties suitable for your portfolio, where to find them, the investing route you'll take, for instance, wholesaling real estate, house flipping, or renting, and also create an exit strategy.
• Hire A Contractor: Once you've established a clear plan, find and hire a professional contractor to collaborate with throughout your REO investing career. They'll help you avoid getting involved in REO properties with low ROI by accurately assessing the repair requirements of each potential REO property before purchase. This partnership will save you time, effort, and money by allowing you to decide whether a property is worth pursuing earlier in the investment process.
• Account For All Costs: Purchase and repair costs aren't the only expenses that come with a REO property. You'll also have to shoulder carrying or holding expenses such as closing costs, utility bills, and property insurance. So, make a point to account for all these costs before purchasing each REO to determine your profitability accurately.
• Hire An Attorney: Collaborating with an attorney in your REO investing career will greatly improve your peace of mind. They'll always be on standby to review documents such as title and REO contracts to ensure everything is as it should be and prevent you from legally binding yourself in unfavorable terms. So, find and hire a good one.
• Hire An Inspector: Since banks sell REOs as-is, you cannot hold them liable for issues you discover later. So, it's up to you to do your due diligence. Partnering with a professional home inspector during REO property investing will help you avoid bank-owned investments with too many red flags.
• Get Title Insurance: While banks generally clear title issues before listing an REO, getting title insurance is advisable. It'll protect your interests should anything come up.

Can You Wholesale REO Properties?

Yes, you can wholesale REO properties. However, you should first find the listings of bank-owned properties and sell them in the same conditions to prospective investors.

Wholesaling REO homes simply entails making an offer, placing the properties under contract, finding a buyer and selling the properties. Many banks take about just one month to finalize the deals.

Make sure your purchase agreement allows you to assign the contract to your end buyer. 

Can You Flip REO Properties As An Investor?

Yes. As an investor, you can flip REO properties for great returns on investment.

For success, you should consider properties that only require repairs that fall within your budget and capabilities.

Buy REO properties that demand at least 15 percent less than the price of the last similar property sold in the area and consider listing them as rent-to-own properties.

It's wise to have multiple exit strategies and financial reserves in case you run into surprises and need a backup plan. 

What’s The Difference Between REO And Short Sale?

In Real Estate Owned properties, the bank or lender assumes the ownership of the home after:

1. the owner fails to repay his or her mortgage or
2. the property fails to sell at foreclosure auctions.

A short sale, on the other hand, is an alternative to foreclosure. It takes place when the outstanding mortgage loan is higher than what the property can achieve when sold.

In a short sale, the lender accepts a discounted amount from the buyer and releases the security for the loan to avoid potential losses.

Final Thoughts On What To Know About REO Properties

Following the above discussion, there is no doubt REO properties are a rewarding investment opportunity with lucrative returns for real estate investors.

However, it is critical that you properly understand how the foreclosure process works and how to choose profitable REO properties to invest in.

To avoid the pitfalls, you should seek the help of a professional real estate broker with experience in buying and selling REO foreclosure properties.

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*Disclosure: Real Estate Skills is not a law firm, and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks, and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs.