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What is an REO (Real Estate Owned) by a Bank or Lending Company?

Ever see a home listed as an REO and wonder what the heck that is?  An REO means Real Estate Owned by a bank or lender.  Now, most people consider an REO the same as a foreclosure, however, although they are similar, there are subtle differences in the two.  An REO is actually a property that is the result of a failed foreclosure.  What that means is that the bank or Loan company that held the loan for that property foreclosed on it and failed to sell therefore reverting back to the ownership of the lender.

What is a foreclosure?

In a foreclosure, a bank or Loan Company reposes a property due to the loan holder's inability to make payments on their loan or negotiate with the bank or Loan Company. Once a loan holder misses enough payments to constitute foreclosure, the bank will notify the loan holder and begin foreclosure proceedings.  At this point, the bank or Loan Company has the legal right to sell the property, regardless of the property still being occupied by the tenants.

Why is it better to purchase an REO than a foreclosure?

When you purchase a foreclosure, as a bidder you must:

1.       Submit a minimum bid that includes the loan balance on the property, including all accrued interest on the property, Attorneys fees and all the costs associated with the foreclosure process.

2.       Have a cashier's check in hand for the full amount of the bid.

Now, if you are successful you will be offered the house in its ‘as is' condition.  "As is" does not just mean that it is a fixer upper- ‘as is' can also mean occupied by the previous tenants who may very well need evicting.  ‘As is' can also mean burdened by additional liens secured on the property.  Hmmm, this is starting to sound a bit risky, right?  That is why most people who want to buy a foreclosed property will go through the REO route.

The benefit of buying an REO is that it that there is a lot less stress in the process than buying a foreclosure.  Why? Because when a bank or Loan company takes back a property they then have the property listed as a sellable asset on their books. If the foreclosed property can be sold to release cash to invest, then this is the main motive for the bank or Loan Company; sell the property and invest the cash.

Benefits of buying an REO over a foreclosure

Because the bank needs to sell these assets quickly to satisfy shareholders, they will offer greater incentives to buyers.  Some of those incentives may include:

• Savings of up to 20% off the market value of the property
• Market an REO purchase as the most simple way for first time homebuyers and experienced investors to buy properties
• Give prospective buyers have immediate access to the property for home inspections
• Remove all back taxes and liens
• Allow negation on rehab costs, interest, closing points, loan amount, etc.
• Describe the purchase as nearly 100% risk-free
• Accept a less than normal down payment
  
• The bank will evict the tenants for you and remove any existing liens

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