Definition of REO Sales
If you've ever searched for a home on the Multiple Listing Service (MLS) or other property websites, chances are you have come across a property labeled as an REO, or "real estate owned." For the novice home buyer, the term doesn't mean a whole lot. But after further research, you'll find that an REO home is quite different from that of your typical home sale.
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Definition
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For starters, there is a lot of confusion between the term foreclosure and REO. All REO properties start out as foreclosures. When a bank or lender takes back a home from a buyer who no longer pays the mortgage, the lender usually puts the home up for sale as a foreclosed property. However, this does not guarantee that the home will sell, and here is where an REO sale comes in. If a lender cannot sell the home during the foreclosure, then it most likely will become an REO sale in which the lender decides to sell the home rather than at an auction. In essence, the bank is on its own to find a buyer rather than going through a middleman.
Benefits
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A buyer can usually purchase an REO property at 20 percent less than current market value. The reason for this is that the lender wants to sell the home as quickly as possible, and one way to do this is to list the property at a discount. Taking less is better than taking a chance the home will sit on the market for months. Other advantages to this type of sale include access to the home for inspections, easier financing opportunities through the bank, no worries of existing liens or back taxes, clear title, and the possibility of a lower down payment.
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Considerations
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It's no surprise why REO sales appeal to a lot of people when you consider the alternatives as the process is usually a lot faster. Lenders want to move inventory, so they typically respond quickly to offers made on these types of sales. In the case of a foreclosure, the process can take considerably longer as the lender takes bids instead of offers, meaning you're are in competition with other buyers for the same home.
Warning
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REO sales present a great opportunity, but you should also be prepared for properties that require some major repairs, appliances and more. Since these homes were at one time foreclosed on, the previous owner may not have kept the property up to par, which is common under these circumstances. Another issue is that if there is significant damage to the house or major repairs are needed, it can be more difficult to obtain financing, but this difficulty only arises when the home is in need of major repairs. For this reason, some banks will only accept cash offers on REO properties in poor condition.
Conclusion
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REO sales present many benefits to buyers, and most of these outweigh the disadvantages. In the end, however, you'll need to decide if the small risks like property condition and bank disclosures are worth the 20 percent discount often associated with these homes. They can end up being a diamond in the ruff or a money pit. The best approach, as with any property purchase, is a cautious one.
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References
- Photo Credit house image by Cora Reed from Fotolia.com
