Buying your first home or deciding to invest in real estate can be exciting, but it can be daunting, too. Real estate isn’t always the most affordable venture. It depends on the market, sometimes it’s better for the buyer, and sometimes it benefits the seller.
No matter what’s happening in the real estate market, there are ways to find inexpensive properties. When searching for a home on a budget, it’s a good idea to look at properties with the REO label for a more manageable purchase price tag.
If you’ve never heard of REO real estate, don’t worry. In this guide, we dive into all things REO, the advantages and disadvantages, and how to find an REO property near you.
What Are REO Properties?
REO properties, also known as real estate-owned properties, refer to properties that have been acquired by a lender, typically a bank or a mortgage company, through the foreclosure process.
When a homeowner fails to make their mortgage loan payments, the lender initiates foreclosure proceedings to recover the outstanding loan balance. If the property fails to sell at a foreclosure auction, it becomes the lender’s property, and it is then classified as an REO.
Here are some key points differentiating REO properties from other types of real estate:
- Ownership: REO properties are owned by the lender or financial institution that foreclosed on them. In contrast, traditional real estate involves transactions between buyers and sellers, where the sellers are typically individual homeowners.
- Condition: REO properties for sale are often sold “as-is,” meaning they are typically sold in their current condition without any repairs or renovations made by the lender. This distinguishes them from other types of real estate, where sellers may make improvements to attract buyers.
- Financing: Financing options for REO properties can sometimes differ from traditional real estate. Lenders may offer specialized financing or incentives to encourage buyers to purchase these properties as they are looking to recoup their investments.
Advantages of Buying REO Properties
There are several advantages to buying this kind of real estate. Here are some of the main benefits to consider:
Lower Price
In comparison to similar properties on the market and possibly in the same area, REO real estate is typically cheaper. Because these properties often need a bit of work, a buyer might be reluctant to invest. Listing them at bargain prices encourages hesitant prospective buyers to purchase them sooner rather than later.
Clear Title
If you’ve ever purchased property before, you know the title situation can be uncertain, you commonly have to conduct a title search. Title search, also known as property title search, consists of going through public records to discover information about a property’s ownership and any existing claims or outstanding liens is known as a title search or property title search.
With REO property, there’s a clear title. No defective titles or additional title issues will appear, so there’s no need for a completion of title clearance, which makes for a smooth transaction with less stress.
Less Competition
Buying real estate is usually competitive, but that’s usually not the case with REO real estate. Because these properties might need many repairs, there isn’t much interest in them. Buyers are less aggressive about REO real estate because the properties aren’t in the best condition, and they can usually find similar properties elsewhere.
This situation can work for you. Less competition gives you a huge advantage in negotiations and increases your potential to secure your new property.
Profit Potential
Overall, there is so much profit potential in REO properties. Whether you plan on living in the home, flipping it and selling it quickly, or renting it out, the market value will increase as you make changes and extensive repairs.
Potential for Better Financing
Because most lenders want to sell their REO property as quickly as possible, they often provide better financing opportunities. They might offer potential buyers a lower interest rate, better loan terms, and flexible down payment requirements. That is very valuable for those on a budget.
Possible Rental Income
REO property might be a better option than traditional real estate if you’re a real estate investor. Yes, you might have to make some repairs, but because of the lower price point, you can invest in more properties which means more profits later.
Disadvantages of Buying REO Properties
While there are many attractive things about purchasing REO properties, we would be doing you a disservice if we didn’t discuss the disadvantages of buying these properties. Remember, some of the following might not be disadvantages to you, but they’re generally the most significant.
Sold in “As-Is” Condition
When the lender sells an REO property, it will come as-is. Essentially, this means nothing has been done to make the house look more presentable, no upgrades have been added to make it sell faster, which you might see with traditional real estate. Parts of the property might be damaged, neglected, or not up to specific standards.
Competition With Cash Buyers
While there is less competition with REO property, on the whole, you will still compete against cash buyers. If you plan on paying in cash, this might not be a problem, but relying on financing can put you at a disadvantage.
Additional Repair Costs
Since you’re buying an REO property as-is, there’s the possibility that it will need a lot of repairs. Some of them might be affordable, but the home could need a new roof, new plumbing, and more. These repairs can add up quickly and potentially cost you more than the house.
Delayed Closing
Even though a lower price and less competition might make you think buying an REO property is a quick process, there are times when closing becomes delayed. Since you and the lender deal with multiple parties, paperwork and negotiations can delay the buying process.
Lack of a Full Property History
Sometimes, an entire property history is unavailable for an REO building. A comprehensive history includes all previous repairs, maintenance, and issues the property has had. Knowing what needs work and whether the property is a good investment is valuable but is hard to access with REO properties.
We recommend having REO properties inspected by a licensed inspector before you make an offer. Home inspections are inexpensive, averaging about $200-$500. Inspections are a wise investment. If you buy a property without having this done, you might find your new house needs repairs that can cost thousands of dollars.
Limited Property Selection
The availability of REO properties can vary drastically. REO properties might be abundant or limited, depending on location and market conditions.
Potential for Unknown Property Conditions and Liabilities
The foreclosure process can be complex, so you might not know everything there is to know about the condition of the REO property. There could be liabilities that are unstated in the paperwork, etc. A lack of information like this can be discouraging.
Steps to Buying an REO Property
Like buying traditional real estate, buying REO property requires several steps. While the process can vary depending on specific situations, here are the general steps to buying REO property:
- Research local markets: Look for areas with options for REO properties. Consider your budget and which property would be most affordable.
- Locate REO properties: Next, you need to find REO properties in the area(s) that interest you. Hiring a real estate agent specializing in REO real estate can be very helpful. They have insider information on REO, so if you tell them what you’re after, they will do whatever they can to find it.
- Evaluate the property: Drive by the property, hire someone to inspect, and read through all the documentation provided to understand its condition.
- Submit an offer: If you like what you see, submit an offer to the lender.
- Accept the offer: The lender will either accept or reject your offer, in which case you can accept or negotiate a different price and re-submit it.
- Close on the property: Once the lender accepts the offer, pay for the property, including closing costs and other fees associated with the area and REO property.
Remember, you might be stuck in negotiations and have to rebid a few times because your offer is accepted.
Tips for Buying REO Properties
Here are some helpful tips if you’re considering purchasing an REO property.
Work with a Real Estate Agent
While you can navigate REO real estate buying independently, working with a real estate agent specializing in REO will make things easier. Real estate agents can assist you with finding properties, negotiating a bid, providing insights, and more.
Thoroughly Research the REO Property
As tedious as it can be, you must thoroughly research the property you want to buy. When we say research thoroughly, we mean reading through property records, investigating title issues, reviewing tax information, and everything in between so you know exactly what kind of property you’re purchasing.
Be Prepared for Complications and Delays
Delays are common with REO property buying. Caused by multiple offers, delayed inspections, and many other reasons, the best way to deal with this potentially frustrating situation is to be prepared and patient.
Monitor the Real Estate Market
Even though you’re looking for REO properties, you should study the real estate market in general. Compare those costs with the traditional real estate market to see what comparable homes are going for.
Get a Professional Home Inspection
While we encourage you to walk through the property yourself to look for any issues and to assess the home’s condition, you should always get a professional home inspection. Experts trained to notice problems in the wiring, foundation, appliances, and more, inspectors will uncover any repairs needed. An inspection can affect your decision to purchase or encourage you to negotiate a lower price.
Stay Patient and Flexible
No matter where you are in the REO property buying process, you want to do your best to stay patient and flexible. Remember, buying a home can take longer than expected, and it can feel repetitive as you search for the right property and potentially bid and rebid. Don’t rush; you’ll find the ideal property and feel less stressed throughout the experience.
Key Takeaways
REO properties are an excellent option for purchasing a home or an investment property on a budget. They come with lower prices, a clear title, a lot of potential, and more. When considering REO properties, working with a professional real estate agent can ensure you get the best deal and that everything goes as smoothly as possible.
For REO properties and more, head to eXp Realty. We can help you find the best properties around.
FAQs: REO real estate
Real estate is one of those industries that prompts many questions, whether buying or selling. REO property differs from traditional real estate. Below we answer every question you might have about REO real estate.
Is an REO the same as a foreclosure?
No, REO and foreclosure aren’t the same. Foreclosure sale is a legal process in which the lender takes over the property when the owner defaults. A property gets REO status after foreclosure when the lender takes ownership.
What does REO stand for?
REO is an acronym for ‘real estate owned.’ Real estate agents label any property that the lender owns REO.
Is REO a good investment?
Whether REO is a good investment will vary depending on individual situations. REO is a good investment if you’re interested in getting a property at a lower price and have the funds and time to repair and remodel it. For those without the money, time, or skills to make repairs, this might not be an excellent investment depending on the home’s condition.
Who takes ownership of REO?
The mortgage lender (the bank or mortgage company) will take ownership of the REO property once the foreclosure is complete and will retain ownership until the property is purchased.
How do I find REO properties in my area?
There are many ways to find REO properties in your area. REO property listings on eXp are a good option. You can also try checking out auctions, mortgage, and banking websites.
What is an example of REO?
When a house owner defaults on mortgage payments, the lender will start foreclosure. If the house doesn’t sell during the foreclosure auction, the lender will take ownership, and the property will be labeled REO.
