An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction (also known as a Trustee’s Sale). Trustee Sales (often an auctions held on the courthouse steps) begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs associated with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in “as is” condition, which may include someone still living on the property. There may also be other liens against the property. Trustee’s Sales are typically advertised via local, public notices such as local newspapers.
Since what is owed to the bank is almost always more than what the property is worth, very few Trustees’ Sales result in a successful closing. If the Trustee’s Sale is unsuccessful the property reverts to the bank or loan servicer and is now considered REO, or “real estate owned” property.
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will typically negotiate with the IRS and local municipalities for removal of tax/municipal liens and they normally pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will typically receive “clear title” and the opportunity to thoroughly inspect the property. These are the properties buyers will typically see on MLS.
A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you’re offering is comparable to similar homes in the neighborhood. Consider the costs of renovation. Last but not least, consider your loan type and down payment amount. Loans with high “loan to value” (small down payment) generally require that the home be in good condition.
A well informed real estate agent, representing the buyer exclusively is invaluable in such a transaction. There are many pitfalls and complications that can be avoided with such representation.
