How to Buy an REO

As defined in the article “What is an REO and Where Can You Find Them?”, an REO is a piece of real estate that did not sell at auction and subsequently became owned by the lender, usually a bank. Many people believe today that buying an REO will mean purchasing a piece of property at a huge discount, and it can. If you find one you’d like to buy, how do you go about purchasing it?

First, know that when banks price REO’s less than comparable properties, they typically receive multiple offers. Chances are there will be competition for that home. Know the maximum you’re willing to offer. Sometimes you’ll only get one chance to make an offer before the house is sold, and maybe to someone else…

Research market comps, what similar properties in the area have sold for in the last 90 days as well as what similar properties in the area are currently listed for.

Be sure you are preapproved before you make your offer. If possible, get preapproved by the lender who owns the property. You do not have to get your final loan from them, but you want them to know you are approved for the amount you need and many lenders do not trust a preapproval letter from another lender.

With an REO, it’s not a good idea to ask for any extras. Don’t ask for a home warranty, termite work, or anything that is not absolutely necessary. The more you ask for, the less chance you have of getting your offer accepted.

Even so, you will ask for an inspection in your offer. Be sure you put a short inspection period, 7-10 days, so the bank doesn’t have long to wait. Let them know you will move quickly on your offer. If you find things in the inspection that make the property undesirable, you will be able to back out of your offer or renegotiate your offer price.

Many banks are moving away from paying closing costs. Find out ahead of time what you will be expected to pay so you’ll know you’re true costs to buy.

Why will banks sell for less than what was owed on a property? Many reasons. For one thing, there is often more than one loan on a house. People take out second mortgages or home equity lines which can account for 20% or more of what is owed on a property. If two loans were secured to the property (which is common these days), the second lender often does not foreclose and gets totally wiped out in the foreclosure. You are dealing with only the price that was owed on the first loan.

Also, the bank does not want to sit on inventory. Banks are in the lending business, not the real estate business. The lender already saw that it did not receive its minimum bid at the foreclosure sale, so they’re likely to lower the price to get rid of it. A little known fact is that the lender must put aside 8 times the amount of the loan in reserves. For example, if the bank owns a property for $100,000, they cannot lend out $800,000 because of that debt. They are motivated sellers!

If the listing is a relatively new one, it is possible that the bank will not deviate much from its asking price. You’ll probably have greater negotiating power making offers on homes that have been on the market for longer than 30 days.

I’ve added here some lender sites explaining their own requirements. Research before acting and let me know your results. Good luck!