Bank-owned homes, also known as real estate owned (REO) properties, are homes that have failed to sell in a foreclosure auction, and therefore have reverted ownership to the lender. These properties are desirable to many investors as the risk is somewhat mitigated as compared to buying earlier in the foreclosure process. They can be great deals and are typically free and clear of liens (confirm as part of your due diligence process). If you’re wondering how to buy bank-owned homes, you’ve come to the right place. In this post, we’ll explore some of the ins-and-outs of REO properties so that you can be an educated investor.

What is an REO?

An REO, also known as Bank-Owned, is a property that did not sell at foreclosure sale and ownership reverted back to the lender and becomes part of their “Real Estate Owned” (REO) portfolio. Since banks do not want to own properties (they would rather lend money for others to buy them), they will try to expeditiously sell their REO properties. Some properties are immediately placed on the market either through an online auction or a traditional real estate listing process. You may see these properties marketed as “newly foreclosed” or “recently foreclosed.” Other properties receive some repairs and property improvements before being placed back on the market.

Over the past several years, some programs have been rolled out that give buyer’s a “second chance” to purchase properties after the foreclosure sale. Many of these properties are brought to market as “newly foreclosed” and the sellers will pay delinquent property taxes and HOA dues as well as some municipal liens (by contract). This program offers risk mitigation compared to buying in the earlier stages of foreclosure.

Why Buy an REO?

There are several factors that make REO properties attractive to investors. Since lenders are typically motivated sellers (banks do not want to hold onto homes), they are often willing to sell it at a discount. In addition, they usually work to remove any liens against the property, evict any occupants, and may even invest in repairs. On the other hand, REO properties — like all forms of distressed properties — are sold “as is, where is” and may need repairs. 

Investors typically employ two types of investment strategies when buying REO properties:

  1. Fix & Flip: buying properties with the intention of investing in some type of repairs and renovation, then looking to sell the improved property at market value.
  2. Buy & Hold: buying properties with the intention of repairing or renovating and then renting the property out.

What Does “As Is, Where Is” Mean?

Bank-Owned (REO) homes for offered for sale “as is, where is” because there are no contingencies allowed. In normal residential transactions, the buyer may place certain conditions in the contract that need to be met by the seller before the deal can be closed. These are known as contingencies and usually relate to inspections and/or repairs on the property. With REO properties there are no contingencies. 

How Do I Go About Buying a Bank-Owned Home?

The first step in buying a bank-owned home is determining which type of property you’re looking for. This depends on your investment goals — are you looking for a property to fix and flip, to buy and hold, or to live in? Would you be open to a tenant living on the property? Once you’ve clarified what kind of REO you’re looking for and what your budget and desired locations are, you can start exploring the available inventory. 

You can find bank-owned homes for sale on an online auction platform such as ServiceLink Auction | Hudson & Marshall or the MLS (with the help of a real estate agent), which is the traditional real estate sales model. Once you’ve found a property, it’s time to complete your due diligence.

Once you have an idea of repair costs and after repair value, you can calculate your highest-and-best offer and potential ROI. If you plan on renting out the property, research local rent prices to see what you could expect to get back in rent. Many properties are cash-only, though a few allow conventional financing. Hard Money loans are considered “cash” and are secured by the property. Hard money loans allow a buyer to use leverage to buy distressed properties such as REO.

Buying at Online Auction

While some REO properties are sold via the traditional real estate sales model, an increasing number are being offered in online auctions. Online auctions simplify the process and allow you to bid from the convenience of your own home or office. The first step to buying a bank-owned home online is to create an account - create a FREE account with ServiceLink Auction | Hudson & Marshall! 

Once you’ve created an account, you can start bidding in online auctions. If you place the high bid and the bid meets the seller’s threshold for review, you will be asked to submit documentation including a Vesting form, Proof of Funds, Earnest Money Deposit and sign the purchase contract. Electronic signatures can be used to expedite the process. Once the seller executes the contract, escrow is opened and you proceed to the closing process. 

With this information in mind, you can start exploring the world of REO properties as a well-informed investor. 

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