How Does the Sale of a Foreclosed Property Work?

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REO foreclosures involve homes being bought directly from the bank, and they are a result of a homeowner defaulting on their loan. Learn about how the sale of a foreclosed property works with help from a financial adviser with this free video on real estate.

Video Transcript

This is Morgan. He's married. He just had a new baby and he's ready to buy his first home. This is "A Home Of Your Own." In our search for the right home, we heard a lot of people talking about buying a foreclosed home. While we knew many people would buy foreclosures at auction, we decided to focus on an REO Foreclosure and buy it from the bank directly. Foreclosed homes, also called Real Estate Owned or REO Homes are the result are a result of a previous owner defaulting on the loan. REO properties are own by a lender or bank rather than a person. The price for an REO home maybe a good value but this is not always the case. Some are comparable to traditional sales and in similar condition. That's why it's important to work with a real estate agent who has experience with foreclosed homes. A seasoned professional can help you determine if the price is a good value, make a reasonable offer and guide you through any additional paperwork that may come. So, I turn to my real estate agent for an explanation of what buying an REO property might entail. It turns out that some aspects of buying a foreclosed home are similar to a traditional purchase. For instance, I make an offer and include the time frames and all the contingencies I would on any traditional offer. The bank as the owner and seller then responds by accepting, rejecting or countering my offer. But, there are a couple of differences between REO purchases and traditional purchases too. One is that the REO home will likely be sold as is. That means that you'll be responsible for any repairs that need to be made. Should you discover significant issues, you can revise your offer and come back to the lender. Most lenders are willing to negotiate if the property will require major repairs. You can also look into an FHA 203K loan. This type of loan is a mortgage that can cover the home's purchase price plus money for renovation. A 203K loan is based on financing for the home's improved value, thus, the money to pay for the renovations. Another difference is the amount of information the seller has about the house. Given that the bank has not maintain or have first hand knowledge of the foreclosed home prior to acquisition, there maybe no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a seller's disclosure. Buyers are allowed and encourage to complete professional home inspections on a property. That's why it's important to have a licensed home inspector evaluate the condition of the house and the factor in the cost of repairs when determining my offer price. If a problem turns out in one of the inspections, my real estate agents suggest that I write an addendum to the purchase contract asking for the bank to fix it and include a copy of the inspection report with the cost estimate for the repair. The bank might respond with the request to lower the offer price instead. Also, when you present a copy of the inspection report to the bank, it then becomes obligated to disclose it to other sellers, make it more likely to respond to your concerns. A title search is always recommended for any real estate transaction. A title company will check the property for liens, outstanding debts someone is attempting to collect against the property as well as verified that the deed to the home is correct. A title search is especially important when buying an REO property due to the unique transfer of ownership at foreclosure. There maybe liens on the title that may not be uncovered until the closing process begins. Again, a real estate professional who is experienced in foreclosed homes can be a valuable resource in guiding you through this process. Foreclosure properties may present a unique opportunity for interested buyers. Only you can decide if buying a foreclosed home is a good match for your current situation. Consider the pros and cons, do your research and work with qualified professionals to help you make the decision that's right for you.

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