Understand What Reo Means

The term REO means "real estate owned" by the lender and indicates the house or income producing property has been repossessed by the lender and already completed the legal foreclosure process. In most cases, the lender is the bank, which is why you hear the term bank owned properties or Bank REOs. When buying in the post foreclosure phase, the bank or the lender is the owner of the property by either through a pubic auction or an owner agreement during before foreclosure proceedings.

The lender will generally sell or list the property to recover the unpaid mortgage loan(s) and usually clear the title for any prospective buyer. However, the potential discount is usually less than a pre-foreclosure, property from an auction, or through a company that has a large pool of foreclosed properties.

The best way to buy bank-owned properties or REOs is:
1.) Find properties and look at them.

To buy a bank-owned property that's listed on the MLS, get in touch with the listing agent directly. Be aware that the bargain price will diminish if a listing agent is involved.

You can also contact banks and lenders directly and ask for a REO list or bank-owned properties. Be ready to do some phone hopping to find the correct department or individual at the bank who manages foreclosed properties.

Once you find a suitable property, drive by it so you know the condition and the surrounding neighborhood. Take a digital camera for photos and make detailed notes.

2) Assess the bargain. Use the following information:

Banks break-even amount it typically includes the unpaid balance of the loan, any fees absorbed while in the foreclosure process and any supplemental liens the bank needed to repay to acquire the property.

Estimated appraised value (use a local appraiser, look at countys public records for comparable sales in your subject propertys neighborhood, and look at the local MLS active comparable listings, or consult with a competent realtor.)
Now, subtract all your costs as a buyer (the banks break-even amount, unpaid liens, repair costs, your new mortgage payment) from the estimated market value of the property, and make that your offer to the bank.

Your objective as a buyer or investor is to acquire the property below market value, less any necessary repairs. It is entirely manageable if your contact and execution with the bank is flawless. However, more often than not, buyers trying to secure shorts sale purchases or bank owned property find themselves overwhelmed with the banks unresponsiveness and end up giving up.

3.) To successfully get a better bargain and discount than doing it yourself, consider buying through a trusted and experienced company where you pay almost half of what the property is currently worth. Some companies who represent the banks which have closed hundreds of transactions involving bank owned properties:

Buy the property "as is." Some homes are as low as $7,500. Some duplexes as low as $40,000 in move-in condition with renters in place.

You will need to provide evidence that you have the liquid funds or financing arranged to close quickly. You should have 3 pre-approval letters from different institutions since some are discontinuing loan at the last stage. So, be prepared to pay all cash on low price deals that are sometimes 30 to 50 cents on the dollar.

These companies work with banks and lenders that have a large pool of foreclosures. For the lender, these non-performing assets need to be unloaded to get their books in the black. This is truly their loss and your benefit.

Close the deal. Once you've arrived at an agreement with the company, put the agreement in writing. Often they have an experienced real estate attorney who will draw up a purchase agreement and you should lose in four to six weeks or less. The time varies as they need to deliver clean and clear title to the new buyer free of liens, encumbrances with a warranty deed. In addition, some necessary repairs may need to be completed to satisfy the local city or building and safety codes.

Your Funds will be held by Escrow or Title, which acts as a neutral third party, who can oversee the money transfer and property ownership.
Please remember, there is specific time period in which the banks or lenders need to sell their REO properties. The goal is always to get them off the books quick so the faster the better.

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