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Understanding Real Estate Owned (REO) Properties As Investment Opportunities

February 25, 2024 7-minute read

Author: Kevin Graham


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.

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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 homeowners to save 1% – 3% of the purchase price of the home annually for maintenance. However, a foreclosed home can easily exceed this figure.

To give yourself some level of certainty, it’ll be important to get a home inspection. Although the lender or mortgage investor is highly unlikely to fix anything because they want to make as much money as possible rather than sinking money into the property, this could give you some negotiation flexibility. Additionally, it’ll let you know what you’re getting into.

May Be Occupied

If the home is a single-unit primary residence, the lender or their representative will ensure the previous homeowner has vacated the property. However, if it’s a multi-unit or investment property with tenants, you’ll need to tread a little bit more carefully. The Protecting Tenants at Foreclosure Act requires giving the tenants 90 days’ notice. In some cases, you may be required to honor the terms of the existing lease.

Laws in some states may give tenants rights beyond this. Consult a local real estate attorney if you have any questions.

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How To Buy REO Properties As Real Estate Investment

Buying REO properties is often a popular method of real estate investing. There are a few key areas in which buying an REO property differs from the traditional home buying process. Let’s lay them out:

1. Find A Real Estate Agent With REO Experience

When buying an REO property, you have to have a real estate agent. Lenders typically won’t entertain an offer for an REO property from just anyone. You’ll have to work with a real estate agent who submits your offer to an REO agent. These REO agents specialize in dealing with lender sales and represent their interests in the transaction.

2. Get Your Initial Mortgage Approval

Lenders want to be sure you’re a serious buyer. Because of this, you’ll need to have a letter attesting to the fact that you can afford the offer you’re making. While this is true for most home sales anyway, you won’t find a lender who entertains an offer without preapproval.

Additionally, there will likely be different requirements you’ll need to meet if you’re buying an REO property as an investment property rather than a primary residence, so you’ll want to be sure you’re fully aware of any qualifications you’ll need to meet as you begin the mortgage approval process.

3. Find An REO Property

If the REO property is owned by the investor, these can be found through portals maintained by the major mortgage investors:

If the mortgage investor does not manage the REO then the mortgage lender does. In these instances, the mortgage lender would have to be contacted to purchase through the auction platform or listing agent.

REO properties may be labeled as such on multiple listing services (MLS). These services, commonly pulled in through home search sites such as Rocket HomesSM 1 may include ways to filter by REO properties and you’ll likely be able to figure out who the REO agent is.

4. Submit An Offer

You’ll likely submit an offer through the lender or investor’s REO website. Typically, the websites used to submit your offer are the same ones where investors list the homes, such as HomePath from Fannie Mae (FNMA).

5. Hire A Home Inspector

Before you close on your REO property, you’ll want to be sure you get a home inspection. It may sound tempting to skip this step since it’s unlikely the lender will make repairs on the property, but getting a home inspection is still the best way to ensure you’re fully informed on the property’s condition and any work it might need before you buy it.

You might consider trying to include an inspection contingency in your offer so that you have the opportunity to back out of the sale without penalty should the inspection uncover any deal-breaking issues.

The Bottom Line: REO Properties Can Be High Risk, High Reward

Real estate owned properties in the possession of lenders and mortgage investors can be the source of a good deal on a home because a lender is highly motivated to get rid of it. They’re also somewhat less risky than tax foreclosures from an investment standpoint. On the other hand, while you may get a deal, these homes are often sold as-is, so you need to be prepared to make repairs. Make sure to work with an experienced agent who can guide you.

If you’re ready to line up financing to buy an REO property, you can apply online today.

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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.