For many investors or home buyers, bank-owned real estate represents an excellent buying opportunity. "Real Estate Owned" properties typically sell at discounts relative to other listings, letting you buy more house for your money. In exchange for the savings, though, you frequently have to handle additional challenges like a property that needs work or one that has a blemished title.
For most investors, the key reason to look at bank-owned properties is their price: They can usually be bought at a discount compared to non-bank-owned properties. Banks are in the business of taking deposits, lending them out and keeping the profit from the interest rate spread. They aren't organized to own property. As such, when a bank comes into possession of a property, it is usually motivated to get the property off of its books. This means that, in many cases, they sell properties at attractive prices.
Many REO properties are in a state of physical distress. This can be caused by many factors, including deterioration, the fact that homeowners facing foreclosure usually don't make a lot of repairs, or through vandalism and theft of components that some distressed owners unleash on their foreclosed homes. In any case, properties that need work typically sell at even more significant discounts, leaving an opportunity for an investor that can do the work to fix up the property to make even more money.
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Insurable vs. Marketable
Most properties sell with a marketable title. What this means is that the record of ownership of the property is clear at the time of the closing and that the buyer enjoys ownership with no limitations other than those imposed by the government or those that she imposes herself, such as putting a mortgage on the property. When a property has insurable title, it means that there are some defects on the property's ownership that could limit the new owner's interest, but that the defects are manageable enough that a title insurer would be willing to insure the new owner against them. The insurance effectively cancels out the risk that stems from the title defects.
Insurable Title and REOs
Sometimes, the only way to buy an REO property is to settle for an insurable title. Since banks are frequently motivated to sell their property without spending a lot of time or effort on them, the bank may not be willing to spend the time to clear the property's title. If you're looking to buy one of these properties, research the specific title defects. Some defects can be cleared with a little bit of time and effort, and you can do this while you own the property. Others are more serious and could be harder to clear. These defects can limit your ability to sell the property in the future, so you may need to be more wary in this situation.