Understanding Real Estate Owned (REO) Properties As Investment Opportunities

Whether you’re a first-time home buyer on a budget or a novice real estate investor looking for a good value, you might notice that properties with an REO label are selling at more cost-effective prices than others with a similar size and features. But is it the right opportunity for you?

We’ll begin this article by explaining what REO is. From there, we’ll get into how properties gain this status, the pros and cons of buying REO properties, and how to go about doing so.

What Is A Real Estate Owned (REO) Property?

A typical real estate owned (REO) listing has failed to sell during the foreclosure process and is now owned by a mortgage lender, bank or the mortgage investor. Buying an REO property is done through an REO agent or an auction platform. Properties are sold “as is” and often discounted to sell as quickly as possible.

What To Know About Real Estate Owned Property

The big benefit to buying an REO property is that lenders and major mortgage investors are trying to get something out of a property that has been foreclosed on and hasn’t sold at auction. This could mean that they’re often much more flexible on cost and you may get a great deal.

One thing that’s important to know before moving forward is that these are often pieces of distressed property. Properties are typically foreclosed on because a person falls behind on their mortgage. If you don’t have money for the mortgage payment, you often don’t have money for upkeep. Additionally, if you know you’re being foreclosed on, there’s not the usual incentive to keep the home in good repair.

How Does An REO Property Gain Its Status?

There are several steps that need to take place before a home becomes an REO property. Let’s run through them:

The Original Homeowner Defaults On The Mortgage

Pre-foreclosure can occur when someone falls several months behind on their mortgage payment and is unable to agree with their mortgage lender on an option that would allow them to remain in the home, sell via a short sale or deed back to the lender/investor via deed in lieu of foreclosure.

The Property Goes Into Foreclosure

When a property goes into foreclosure, a foreclosure sale is held on a specific date for a specific price. If there is no successful purchaser of the property, the lender or the investor on the loan takes over management of the property. If the property is occupied, the occupant will be evicted.

The Home Becomes A Post-Foreclosure Property 

Properties unsold at the foreclosure sale are referred to as REO. If the property fails to sell at the specific price, it becomes REO inventory.

Pros Of Buying REO Properties

It’s important to note that there are pros and cons for both people looking for their next home and those who are looking at them as an investment property. The major benefits of REO investment breaks down to three different areas. Let's touch on them next.

Low Price

One of the typical drivers of REO sales is their low price. Lenders are more motivated to sell REO properties in order to recoup their loss from the foreclosure, so they are more likely to sell the property below market value in order to get rid of it quickly.

No Outstanding Taxes

Buying a home that was foreclosed on by a lender is often better than buying a home that was previously a tax foreclosure. The reasoning for this is that the new owner of the home that was previously foreclosed on for taxes often inherits the tax bill, which can be an unwelcome surprise. You’ll want to do a title search and see what kind of guarantees a lender will give you.

Negotiating With Motivated Banks

Banks, mortgage lenders and other mortgage investors aren't in the business of holding onto and maintaining property. Because of this, they may be more motivated to get what they can and dispose of the property faster than the average seller in a traditional sale. This could give you some flexibility to negotiate on price. Your real estate agent can advise you on leeway.

Cons Of Buying REO Properties

While there are benefits, there are also numerous potential drawbacks to buying an REO property. Let’s go through them.

Sold ‘As Is’

The first drawback with REO is that you are buying a house sold "as is." This means you’re getting the house and everything that comes with it. Sure, that could include a bathroom with a luxurious spa-like ambience, but it could just as easily mean a hot water heater that doesn’t work.

Uncertain Title Status

Beyond that, sometimes you won’t get a full guarantee that no one else has a claim to the home, so the purchase of an owner’s title policy could be a huge boon to give yourself some protection in case there are later title issues.

Can Require Expensive Repairs

As we started to get into above, REO homes may require extensive repairs in order to make them livable. The previous homeowner may not have had the funds for upkeep.

Generally, it’s a good idea for homeown