What’s REO? Pros, cons, and how to buy one

Real estate owned (REO) homes represent a lucrative portion of the housing market in areas where foreclosures are common. These properties can offer unique opportunities for savvy buyers, like a lower tax burden and fast closing times, but they also come with specific challenges that traditional home purchases don't have. 

This guide will break down what REO is and help you decide if an REO property fits with your homebuying goals.

What’s ‘real estate owned’?

A real estate owned property, commonly called an REO property, is a home that has been foreclosed on and is now owned by the bank or lender that originally financed the mortgage. When a homeowner defaults on their mortgage payments and the foreclosure process is complete, the property doesn't always sell at foreclosure. If no buyers purchase the home at auction, ownership reverts to the lender, making it a real estate owned property.

Banks and lenders prefer to lend money and collect interest payments rather than deal with property maintenance, taxes, and the complexities of being a landlord. So, lenders are motivated to sell REO properties quickly, often at below-market prices to get these assets off their books.

The key difference between an REO property and a regular home sale is that you're buying directly from the bank rather than from an individual homeowner. This has a number of benefits, but also can create complications:

— Seller motivation: Banks want to sell quickly, meaning you may get a good deal.

— Emotional factor: Banks have no emotional attachment to the property, potentially making negotiations more straightforward.

— Property condition: Banks won’t maintain or improve the property before sale.

— Documentation: Bank-owned properties sometimes have limited property history and disclosure compared to owner-occupied sales.

— Timeline: Bank approval processes can affect closing schedules, although the timeline of acquiring an REO property is usually faster than a traditional sale.

How does a property become an REO?

The journey from occupied home to REO property generally goes as follows:

— Missed payments: The homeowner falls behind on mortgage payments.

— Default notice: The lender sends a notice of default and attempts to work with the homeowner.

— Foreclosure filing: A legal foreclosure process begins if no resolution is reached.

— Public auction: The property is scheduled for foreclosure auction or trustee sale.

— Failed auction: If no buyers bid above the minimum price, the bank takes ownership.

— REO status: The property becomes bank-owned and is prepared for resale.

If the property doesn't sell at auction, the lender becomes the owner by default. The bank essentially "bids" the amount of the outstanding loan, and if no one else bids higher, the property becomes part of the bank's real estate inventory. At this point, the foreclosure and REO process is complete, and the property officially becomes a real estate owned asset that the bank will try to sell through traditional real estate channels.

Pros of buying REO properties

REOs can be an excellent option if you’re wanting to close on a property quickly — and potentially get a great deal. Here are several benefits of buying an REO property. 

Low price

Banks are motivated sellers who want to recoup their losses and move these properties quickly. This includes below-market pricing, flexibility on negotiations, and quick sale incentives that banks use to close faster.

No outstanding liens or taxes

When you buy an REO property, you can feel confident that the title will be clear of most liens and back taxes. Banks clear these issues before putting the property on the market because they need to provide a clear title to the buyer. You won't inherit the previous owner's unpaid property taxes, homeowner association fees, or other liens that might be attached to the property.

Potential for quick closing

Since banks are motivated to sell and have the resources to handle transactions efficiently, REO purchases can sometimes close more quickly than traditional home sales. Banks often have dedicated REO departments and established processes for handling these transactions, which can streamline the buying process.

Cons of buying REO properties

Here are a few things that may give you pause before buying an REO property.

Sold as is

Banks almost always sell REO properties in their current condition, so they won't make any repairs or improvements before the sale. Therefore, you might see issues like weather damage, vandalism, electrical system failures, and code violations. These could be expensive problems to fix after you own the property.

Competitive bidding

Popular REO properties in desirable areas often attract multiple buyers, creating bidding wars that can increase prices. Even though these properties start at below-market prices, competition from investors and other buyers can quickly eliminate much of the potential savings.

Cash buyers typically have an advantage in REO purchases because they can close quickly without worrying about financing contingencies. If you're financing your purchase, you might be at a disadvantage compared to investors who can pay cash.

Limited disclosure

Banks typically don't have detailed knowledge about the property's history, condition, or any issues that might exist. Unlike individual sellers who live in the home and know its quirks and problems, banks can only provide limited information about the property's condition and history.

How to buy an REO property

If you’re looking to buy an REO property, here’s how you can go about the process.

Find an agent who understands REOs

Experienced real estate agents know the unique aspects of these transactions, including how banks handle offers, what documentation you'll need, and how to structure competitive bids to make your purchase.

Your agent will also know where to find active, attractively priced REO properties before they hit the general market. They'll understand the timeline expectations and can help you avoid common pitfalls that trip up inexperienced buyers.

Research and find properties

If you’re not working with an agent, you can find REO properties yourself through several channels like bank websites, MLS platforms with REO filters, and real estate platforms like Zillow and Realtor.com.

Some banks also work with asset management companies specializing in handling REO sales. These companies maintain websites with current inventory and can provide additional information about available properties.

Get pre-approved for financing

Before making offers on REO properties, get pre-approved for financing so you know exactly how much you can afford to spend. Banks selling REO properties want proof that you can complete the purchase, and a pre-approval letter demonstrates that you're a serious buyer.

With Better, you can get pre-approved in as little as three minutes by answering a few simple questions online. This streamlined, 100% online process means you won't have to deal with the paperwork hassles that can slow down other buyers.

...in as little as 3 minutes – no credit impact

Make a competitive offer

When you find an REO property you want to buy, work with your agent to submit a competitive offer. REO offers typically require the following documentation:

— Pre-approval letter or proof of funds

— Earnest money deposit (often 2–5% of purchase price)

— Shorter inspection period agreement

— As-is purchase acknowledgment

— Bank's standard purchase contract addendum

Be prepared to act quickly, as good REO properties often receive multiple offers within days of listing.

Be prepared for the inspection and appraisal

Once your offer is accepted, you'll typically have a limited time to complete your inspection and appraisal. Remember that you're buying the property "as is," so use the inspection to identify any major issues that might affect your decision to purchase.

Close the deal

After the inspection and appraisal, if you’re happy with the condition of the property, close the deal. Stay in close communication with your lender and agent throughout the process, and be prepared to provide any further information the bank requests.

Getting started with REO investing

REO properties can offer excellent opportunities for buyers willing to do their homework and accept the unique challenges of these transactions. While the potential for getting a good deal is real, it's important to understand that you're buying a property in its current state and may face competition from other buyers and investors.

If you're ready to explore REO opportunities, make sure you have your financing lined up first. Better's simple, fully digital mortgage process can help you get pre-approved quickly and close efficiently, giving you the competitive edge you need in the REO market.

...in as little as 3 minutes – no credit impact