How to Buy REO Properties

“REO” stands for “Real Estate Owned.”

Lenders give this name to properties they’ve taken possession of as a result of their borrowers’ default. Every lender has an REO department that handles the maintenance and disposition of REO properties. It’s not always obvious how to buy REO properties though.

It is the challenge of the lender to properly manage its real estate owned properties, trying to maximize the return on the sale of the property and minimize its loss. It is also critical for the lender to liquidate the asset as quickly as possible to turn the illiquid collateral into cash. REO generally represents a loss to the lender, so they are anxious to get as much money as they can for the property as quickly as possible.

There are several ways to find REO properties for sale. Below are a few of the more effective methods:

1. Hire a real estate agent that specializes in REO. Many lenders and loan servicers align themselves with a small group of realtors who have the inside track on real estate listings and new rehab homes on the market. You can generally find an experienced realtor by doing specific internet searches for REO real estate agents and brokers in your geographic area of choice.

2. Align yourself with a wholesaler. Wholesalers are people in the business of finding rehab properties for others to purchase. The wholesaler will generally put the property under contract with the right to assign it and then find a buyer who will actually purchase the property at closing. The wholesaler will generally charge the assignee a fee for their services in locating the property. This may not be the most cost effective way of purchasing real estate owned properties, but many wholesalers are tied into the REO market and may save the rehabber significant time and energy in finding rehabs. Read more about wholesalers here.

3. Search for lists of real estate owned published by banks and services. Several large lenders and loan servicers put their bank-owned homes online for anyone to see. These REO lists will then refer anyone interested in the property to the local agent handling it. This can be a good way to locate properties and get names of real estate agents who are REO specialists. You can also find websites that share lists of bank-owned properties for sale such as BiggerPockets.com, REIClub.com, etc. However, beware that the lists are not always current.

Pitfalls of Buying a Bank Owned Home:

1. The REO property may have been the subject of a long, drawn out foreclosure, and perhaps an eviction. During the time that the legal actions were proceeding, it is unlikely that the prior owners of the property maintained or improved it. Banks will sometimes have the properties fixed up, but as absentee owners, they do not always have a true picture of the conditions inside the property and the quality of any repairs. Make sure that you have an inspector that you trust go through the property.

2. The Lender may have unrealistic expectations of the value of a real estate owned property. Many lenders and loan services do not understand the market in which a house is located. This is especially true for a new REO listing. Accordingly, your perfectly reasonable offer for a bank owned home may be summarily rejected because the seller doesn’t know the true value of the property. If your offer is rejected, you may need to make it again and again, until the asset becomes old enough for the bank to be willing to sell it at a lower price.

3. Banks and servicers are a bureaucracy and their response to your offer for an REO property may be very slow. In a normal real estate transaction, a buyer makes an offer and the seller generally responds within a day or two. When buying bank owned homes, however, the transaction may differ significantly. The buyer will make an offer on the REO, and may not get a response for days, weeks, or even months. In the meantime, the buyer is left wondering whether to find another property or to wait it out. After an extended period of time, the bank may accept the offer on the real estate owned property, but it may also reject it. In this last case, the buyer has wasted his or her time waiting. This can be a very frustrating process.

Buying an REO from a bank or loan servicer can be a great way to find good rehab projects, but they are not always easy to deal with once you find them. A great deal of diligence and patience, however, can result in a very profitable project.