Understanding Real Estate Owned (REO) Properties
REO stands for "Real Estate Owned," referring to a property that a lender, typically a bank, owns after the borrower defaults on their mortgage and the property does not sell at a foreclosure auction. Lenders aim to sell REO properties, often at a discount, to recover their financial losses.
Key Points About REO Properties
How They Are Sold: Lenders typically sell REO properties through real estate agents or online listings. In some cases, they may work with REO specialists to generate more interest and attract buyers.
Condition: REO properties are usually sold "as is," meaning the buyer is responsible for any repairs or renovations. These properties may need minor fixes or extensive rehabilitation, depending on their condition.
Competition: Investors often target REOs, creating a competitive buying environment.
An REO (Real Estate Owned) property is a home that a lender, typically a bank, takes ownership of after a foreclosure or deed in lieu of foreclosure.
What is Foreclosure?Foreclosure is the legal process in which a lender attempts to recover the balance of a mortgage loan after the borrower defaults. The property is sold at a public auction, but if no one buys it, the lender becomes the property's owner.
How REO Properties WorkOnce the lender takes ownership, the property becomes an REO (also called a "bank-owned home"). Lenders aim to sell these properties quickly, often at a discount, to recover their losses. These homes are typically listed for sale through real estate agents or online platforms.
Risks of Buying an REO PropertyREO properties are sold "as is," meaning no repairs or improvements are made before the sale. Buyers may face significant repair costs, as these homes are often in poor condition due to neglect or damage from prior occupants.
REO Understood
Learn more about REO and what it means for you as a buyer.
The process of a property becoming REO begins when a borrower stops making mortgage payments, prompting the lender to initiate foreclosure. Depending on state law and the circumstances, the foreclosure may be judicial or nonjudicial.
At the end of the foreclosure process, the property is sold so the lender can recover the outstanding loan balance. During the foreclosure sale, the lender places a "credit bid" equal to the debt owed, plus fees and costs. Other bidders must pay in cash or with a cash equivalent, like a cashier's check.
In most cases, the lender is the highest — and often the only — bidder at the foreclosure sale. When no other buyers step forward, the lender takes ownership of the property, which then becomes classified as Real Estate Owned (REO).
If the lender wins the foreclosure auction, the property is classified as "Real Estate Owned" (REO).
A "Real Estate Owned" (REO) property is a bank-owned property that did not sell to a public buyer at a foreclosure auction.
Most properties become REO through the foreclosure process, but the term also applies to properties the lender acquires through a deed in lieu of foreclosure.
Once a property becomes REO, the loan servicer typically has a general understanding of its condition and occupancy status. This is because the servicer conducts periodic drive-by inspections after the borrower defaults and throughout the foreclosure process.
After foreclosure, if the property is vacant, the servicer will secure it by re-keying the locks and addressing any urgent repairs needed to protect it from further damage.
Holding REO properties for an extended period is costly for lenders. They must cover expenses like maintenance, property taxes, HOA fees, and insurance. These properties are also at risk of vandalism and other criminal activity, adding to the lender's financial burden.
To minimize costs and risks, lenders aim to sell REO properties quickly. They often list them below fair market value to attract buyers and expedite the sale.
After a foreclosure, the loan servicer may hire an REO management company to oversee the sale and handling of the property. These companies provide a range of services, including:
Eviction Services: Managing the removal of any occupants still living in the property.
Redemption: Handling the process if the previous owner has the legal right to reclaim the property.
Property Maintenance: Ensuring the property is presentable and secure by removing debris, making repairs, and maintaining the landscaping.
Market Analysis: Assessing the property's value to determine an appropriate listing price.
Marketing Services: Promoting the property through listings and advertising to attract potential buyers.
Title Services: Ensuring the property has a clear title, free of liens or legal issues.
Sales and Closing Services: Managing the sale process, negotiating with buyers, and handling closing procedures.
These services help the lender sell the property efficiently while reducing risks and holding costs.
If the foreclosed property is a single-family home still occupied by the former homeowner, the servicer will initiate an eviction. Before doing so, the servicer or REO management company may offer a "cash-for-keys" deal, providing financial incentive for the homeowner to leave voluntarily.
For multi-unit or investment properties with tenants, the Protecting Tenants at Foreclosure Act (PTFA) applies. This federal law allows tenants to remain in the property until their lease ends, unless the new owner intends to use it as a primary residence or the lease is month-to-month or terminable at will.
The PTFA also requires servicers or REO managers to give tenants longer notice periods before they are required to vacate, offering added protection for renters.
If the foreclosed property is a single-family home still occupied by the homeowner, the servicer will proceed with an eviction. Before this, the servicer or REO management company may offer a "cash-for-keys" arrangement, providing the homeowner with financial incentive to vacate the property voluntarily.
For multi-unit or investment properties with tenants, the Protecting Tenants at Foreclosure Act (PTFA) comes into play. This federal law allows tenants to remain in the property until the end of their lease, unless the new owner intends to occupy the property as their primary residence or the lease is month-to-month or terminable at will.
The PTFA also mandates longer notice periods for tenants before they must vacate, ensuring additional protection for renters.
Pros of Buying an REO
Most lenders prefer not to hold on to REO properties for long, so they typically list and sell them at a discount. As a result, buyers can often purchase these homes for a very reasonable price.
If the homeowner wasn’t underwater during foreclosure, REO properties are usually priced below their fair market value. The lender’s main goal is to recover the amount the borrower failed to repay, rather than securing the property’s full market value.
Lower prices mean you get more value for your money. Since lenders require a down payment and don’t offer loans covering the entire purchase price, the loan balance is often lower than the property’s market value. As a result, the lender’s minimum acceptable offer is typically below the home’s fair market value, allowing you to get more for your investment.
REO properties, priced lower, can also lead to higher profits if you choose to resell them after making repairs or upgrades.
In most cases, REO properties are free of outstanding liens or unpaid taxes, as foreclosure clears junior liens. Lenders usually pay off any remaining property taxes before listing an REO for sale to ensure a smooth transfer of ownership.
However, it’s still wise to perform a title search to verify the property has a clear title and that taxes are current. A title search reviews public records to confirm all liens are settled. Unlike buying at a foreclosure auction, where title issues can be riskier, performing a title search for an REO purchase is standard practice. It’s also advisable to purchase an owner’s title policy for protection against any future title problems.
Another advantage of buying an REO property is the negotiation process, which is typically more straightforward. With no homeowners involved, there’s less emotion or personal attachment to the property, making the process easier and more detached.
Cons of Buying an REO
REO properties are typically sold as-is and often require repairs.
Why REO Properties Need More Repairs:Homeowners facing foreclosure are often unable to afford basic home maintenance. This can result in deferred repairs and upkeep, sometimes for years. Additionally, as foreclosure becomes imminent, many homeowners lose the motivation to maintain the property. In some cases, homeowners may even intentionally damage the property before losing it. As a result, you may end up with a house that requires significant repairs or renovations.
The cost of repairs could offset the savings you initially gained from purchasing the property at a discount. Experts suggest that even in a regular real estate transaction, you should budget for one to three percent of the purchase price each year to account for wear and tear. For a foreclosed home, these costs can be significantly higher.
Get a Home Inspection:To avoid unexpected issues, it's essential to have a home inspection before buying an REO property. However, unlike a foreclosure auction, where you buy the property as-is with no recourse, you may still be required to accept the property in its current condition, regardless of what the inspection reveals. The lender typically won't make any major repairs, so you should be prepared for potential upgrades or renovations. You can use the findings from the inspection as leverage during negotiations.
Competition for REO Properties:Another downside to purchasing an REO property is the competition. If the price is particularly attractive, you may find yourself competing with investors, landlords, and other buyers who are aware of the benefits of REOs. As a result, you may be up against multiple offers for the same property.
How Do I Find REO Properties in My Area?
The REO management company may enlist a local real estate agent to list REO properties on the Multiple Listing Service (MLS), a network used by real estate professionals to market homes. Since access to the MLS requires a real estate license, working with an experienced agent can be advantageous.
Mortgage investors like Fannie Mae and Freddie Mac, along with government agencies such as the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA), acquire REO properties through foreclosure or deeds in lieu of foreclosure. You can find REO properties held by these organizations on their respective websites:
Fannie Mae: HomePath.FannieMae.comFreddie Mac: HomeSteps.comFHA: HUD Home StoreVA Guaranteed Homes: VRM Properties
Additionally, websites like Auction.com and Foreclosure.com also list REO properties for sale.
Getting Help With REO Properties
If you have questions about buying an REO property or need assistance with the process, it’s a good idea to work with an experienced real estate agent or consult a qualified real estate attorney.
If you're a homeowner facing foreclosure and need more information about the process, consider contacting a local foreclosure lawyer. Feel free to reach out to me if you need help finding a trusted attorney.
For guidance on alternatives to foreclosure, such as a loan modification or short sale, you can speak with a HUD-approved housing counselor who can assist you at no cost.
Buying REO, Short Sale and Foreclose Properties
Buying Below Market: A Smart Investment Opportunity
REO/Bank Owned, Short Sales, and Foreclosures: Prime Denver Properties at Discounted Prices
As a real estate investor in Denver, your goal is to acquire quality homes with strong potential at the lowest possible cost. The current mortgage crisis presents a unique opportunity for savvy investors. Many homes in the foreclosure process, particularly in the Denver area, are in excellent condition and offer a chance to purchase properties well below market value. Typically, you can expect to buy from a lender at anywhere from 82% to 90% of the property's market value, providing significant savings and a solid investment opportunity.
Denver Foreclosures/bank owned properties/short sales
When a Denver homeowner falls behind on mortgage payments, the lender may begin the foreclosure process by filing a "Notice of Election and Demand," which formalizes the proceedings. However, this doesn't mean the home is lost immediately. The homeowner typically has between 110 and 125 days to resolve the situation. The foreclosure process is lengthy, but there are opportunities to purchase properties throughout, from the initial filing to the sheriff's auction and beyond.
Foreclosures, bank-owned properties, and short sales are usually sold "as-is." While you can inspect these properties, the bank typically does not negotiate based on inspection findings. However, for significant issues, lenders may sometimes offer concessions.
Let us help you find the ideal foreclosure investment. Call us today or explore our list of foreclosure and pre-foreclosure properties in Denver. You can also use our "Home Search" feature to set up custom Auto-searches, which will update your email with listings tailored to your specific criteria.
Foreclosure Timeline
You may come across foreclosure lists online, which often include homes in "pre-foreclosure." This means the lender has filed for foreclosure, but the redemption period has not yet expired, giving the homeowner a chance to resolve the situation and keep the home.
For bank-owned properties, you can typically expect a quick response to your offer, usually within a few days. If your offer is accepted, the bank will provide an "addendum to contract" that must be signed by you. This addendum will outline various terms, including the "as-is" clause, deadlines, and other important details, and it will override the original contract. However, while banks tend to respond quickly to offers on REOs and bank-owned properties, short sales are a different story. In these cases, it may take several months to receive a response from the lender.
Denver Short Sales
While a home is in pre-foreclosure, the homeowner may have the option to sell the property, with the lender's cooperation, to avoid the foreclosure process and the negative impact on their credit report. If the homeowner has equity in the property, meaning the resale value exceeds the amount owed, selling is relatively straightforward, allowing the homeowner to avoid foreclosure and potentially walk away with a profit. However, if the homeowner is "upside down"—owing more than the home's current market value—the situation becomes more complicated. In a soft market or when the homeowner made a small down payment, the outstanding mortgage may exceed the home's selling price. In this case, the homeowner may pursue a "short sale," where the property is sold for less than the amount owed to the lender.
Buying a short sale property in Denver differs from traditional home buying and involves additional steps. With your offer, you must include a "short sale addendum." Short sale investing requires considerable patience, as the process can take several months to complete.
Denver REO Homes/ bank owned
If a foreclosed home goes unsold at auction, the lender retains possession and the property enters their REO (real estate owned) portfolio. Denver REO homes are often vacant, and over time, their condition may decline. Despite this, they can offer good value, although some renovation may be required to bring them up to standard.
At auction, the lender likely hoped to secure bids covering at least the amount owed. However, once the property becomes REO, the lender may be willing to accept a lower offer. It's common to find REO properties priced at 82 to 90 percent of their market value. This is because the lender now owns the property and is responsible for taxes, maintenance, legal fees, and potential fines if the property falls into disrepair. These costs motivate the lender to sell quickly, and you’re likely to receive a response within a few days—much faster than with a short sale, which can take months. This urgency gives you more negotiating leverage when buying an REO property.
HUD Homes in Denver
The U.S. Department of Housing and Urban Development (HUD) maintains a large and consistent inventory of repossessed homes for sale. These homes can offer good value, typically priced 10 to 25 percent below market rates, but don’t be misled by promises of “pennies on the dollar.” Most HUD homes will require some work to bring them up to standard.
As a Denver investor, however, you may face restrictions. HUD’s primary goal is to increase homeownership in the U.S., so they give priority to owner-occupants over investors. If no owner-occupants place a bid within the first ten days of listing, investors can then submit offers. While you’ll be able to inspect the home, it is sold “as is,” and repair requests cannot be included in your offer. We are HUD certified, so come by our office and let’s explore the Denver HUD homes currently on the market!
