An REO (Real Estate Owned) simply means that the foreclosure process on a particular house has gotten to the point where the bank has taken back ownership of a house from the owner. The bank can then put the house up for sale through an agent or put it up for auction.
There are a couple of advantages to buying REOs. One is that you don’t have to pay cash or be cash ready like you would at a foreclosure auction. REOs that are listed with a real estate agent, you can purchase the home with a traditional mortgage just like any other property.
The second advantage is that with REOs the bank is ready and eager to sell. Even though the bank will still try and get what is owed on the house as well as foreclosure fees through the sale of the house, but as a buyer, there’s an opportunity to get the property at a much lower price than a traditional sale.
Some disadvantages can be the house you want may be in need of some serious and expensive repairs from being unoccupied for a long period of time. Not to mention that since the previous owners were being foreclosed, they may not have kept up the maintenance on the home or worse yet, could have been vengeful and destroyed the house because they were losing it. All of these issues can cause you to invest more in the home than originally expected.
If you are really interested in an REO property, take pictures of areas that are need of repair before putting in an offer and especially before entering into a contract for the home. Show the pictures to contractors for estimates, if you can bring a contractor to the actual property, even better. You may luck out and the home you’re interested in may just need some cosmetic fixes and not extensive damage repair.
After getting estimates, your next step should be with your lender. You may be able to borrow more than you need to purchase the home and use the additional funds for repairs. This isn’t guaranteed, but you can discuss a renovation loan to purchase a home in need of repair called an FHA 203K Home Repair loan.
The purpose of this type of loan is to allow the buyer to make cosmetic repairs primarily. An option for you if there are more extensive repairs such as foundation issues is an in-house bank construction loan. These loans are at a higher interest rate, but will help you make the repairs and let’s face it, you can always refinance the loan once the repairs are complete.
REOs are good deals if you can buy the property and pay for the necessary repairs and updates comfortably without putting you in a financial bind bringing the property up to neighborhood standards.
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