What You Need to Know Before Buying REO

Coconut Point / Bonita Springs / Estero / Real Estate

By D. Michael Burke

Article as published in The News-Press May 22, 2010

You may have heard that buying REO homes can mean a good deal for the buyer, but before considering this option, you need to know what REO is and what it means for you, the buyer.

REO stands for real estate owned, and refers to a home that has been foreclosed on and is now owned by the original lender. These types of foreclosures are more common these days than the traditional scenario most people think of when they hear the term, which is where the house is auctioned off to the highest bidder. Usually, what you think of as a foreclosure is already bank-owned or REO – because the lender usually sets the starting price at the auction at what is actually owed on the house, there usually aren’t any bids, so the home reverts to the lender.

My point is, an REO sale is a bit different than a normal sale, and buyers need to be aware of this – or have an agent who is familiar with buying REO properties. An experienced agent knows that the first thing you need to do when considering an REO home is to figure out the true value of the property. You do this by performing a comparative market analysis (CMA) of comparable closed sales in the neighborhood in the last six months, which will tell you price per square foot and current trends (trending up, down, or staying the same). By figuring out this information, your agent can develop a pretty close estimate of the true value of an REO home.

It is also helpful to find out how much was owed on the property at the time of foreclosure. This isn’t necessarily what you should offer, as the housing bubble and past lending practices mean that sometimes more was owed on the home than what it is currently worth. However, it will give you a better feel for what offers the bank will be willing to consider.

When it comes time to make an offer is when you want to have an agent who is knowledgeable about bank-owned properties on your side. For instance, whereas it is normal and expected for offers to come in a little under the list price with a seller-owned home, when you are buying an REO home you actually need to make your offer a little above the list price. The reason for this is that the list price is already set bargain-basement low in order to attract buyers; if you want in on the deal, you will have to offer a little higher, and hope that no one comes in above you.

When making an offer on an REO property, you should assume that you are most likely going to receive a counteroffer. You and your agent need to decide how high you are willing to go, based on the true value of the home and how determined you are to get a good deal, and either send them a counteroffer of your own, or a best and final offer. Part of shopping for a bank-owned property is being willing to walk away from it if you don’t get the deal you are looking for, not to mention realizing that you are not likely to get your first choice. It is standard practice in this market to make offers on multiple properties, in the hopes that one of your offers is accepted.

Finally, be sure that your funding is all in order before making an offer on an REO home, and be sure to submit proof of funding along with your offer. You have several factors in play here that make this a necessity: First, the bank is essentially losing money as long as they hold the property, so they are going to be interested in selling the property as quickly as possible. Therefore, it is in their best interests to choose an offer where the buyer demonstrates that they have guaranteed funding. Second, with rock-bottom listing prices, most REOs have lots of competition, which means that if you want your offer to have a chance of being chosen, you need to be sure all your ducks are in a row!

Buying a bank-owned home can be a bit different from a traditional sale, but in today’s market, your savings can be substantial. However, how successful you are – and how good a deal you get – depends heavily on whether your agent has experience with buying REO. For more information on how shopping for bank-owned property differs from a more traditional approach, or to talk about how much money you can save by buying REO, please feel free to contact me. My door is always open!