When a bank repossesses a property, the bank will try to sell the property at a foreclosure auction to recover the outstanding balance of the mortgage plus interest charges and other administrative fees. Real estate-owned properties, also called bank-owned properties, are empty homes that were not sold at foreclosure sales. When a property goes into REO status, the bank will try to sell the property to offset its costs of maintaining the property, including paying property taxes and complying with local housing codes.
At a foreclosure auction, if there are no bids to purchase a particular foreclosed property, the bank will acquire the deed to the property. Subsequently, the bank will transfer the property to REO status. When a property is in REO status, the bank may consider selling the property for an amount less than the current market value, especially if the home has been empty for a considerable length of time or is located in weak housing markets.
REO Property Values
Most lenders sell REO properties as is, meaning they will not perform any improvements on the home, and the market value of the property is the amount the property is valued at on the date it’s appraised. The longer a property remains in REO status, the more likely some banks may be willing to accept offers that are less than the market value, if the costs of maintaining the property are higher than selling it for less than the market value. However, most banks will not set the purchase price too low simply to sell it, because they are interested in recovering their investment in the property. But they are more willing to negotiate discounted prices for older houses and houses that are susceptible to deterioration and vandalism.
Purchasing REO Properties
You have the opportunity to earn a profit by investing in an REO home. At foreclosure auctions, the bank may set higher prices, and the properties may have other liens and encumbrances against them. Once a property enters into REO status, the lender will remove all junior liens, such as tax liens or mechanic’s liens before selling the property to an investor. Some lenders will provide you with the opportunity to inspect the property before purchasing it to determine whether you want to continue the purchase process, and lenders often offer lower interest rates and accept lower than average down payments.
Negotiating With Lenders
Banks maintain lists of REO properties, and they typically house loss-mitigation departments that handle these types of properties. You can find REO properties online or contact the lender’s loss-mitigation department and speak with an REO asset manager. Some lenders prefer negotiating with real estate investors before they place the property on the market. However, once the property has been placed on the market, you can contact the lender and make an offer to purchase the home.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.