Have you considered buying a bank-owned home, otherwise referred to as a real estate owned (REO) home? These properties could present unique opportunities for buyers looking to find a home.
If you’re curious about these types of properties, we want to equip you with the knowledge necessary to make an informed decision. This guide outlines how REO properties work, how to navigate the process and how to put yourself in a strong position when purchasing an REO home.
Considering buying an REO home? If you’re taking on a home in need of repairs, know that Newrez offers renovation loans. Reach out to us to learn more.
What Is an REO Home?
An REO home is a property that has gone through foreclosure and has failed to sell at auction. At this stage, the lender or bank becomes the legal owner and typically lists the property for sale through real estate agents or through auction.
Key characteristics of REO properties include:
- Clean title with liens removed (in most cases, after foreclosure)
- Sold as-is with little to no seller repairs—may be in need of renovation
REO homes may provide an opportunity for experienced buyers to acquire a home as-is and then increase its value by making repairs. This is when a Newrez renovation loan could be instrumental, allowing the buyer to roll their project costs in with a mortgage payment. Learn more about Newrez renovation loans in item 8 in this article.
1. Preparing to Buy an REO Property: Financial Readiness and Pre-Approval
Before searching for REO homes, it’s a good idea to lock in with:
- Full mortgage pre-approval* from Newrez: Pre-approval lets you know exactly how much house you can afford, and a pre-approval letter shows sellers that you’re a serious buyer. Learn more about pre-approval here.
- Proof of funds if paying cash
- Documentation of reserves as well as down payment and closing funds
- A clear budget that accounts for repairs, inspections and contingencies
Banks and lenders may like to see strong evidence of financing. Being fully prepared gives you negotiation power and improves your chances when multiple offers are present.
2. Finding REO Listings and Evaluating Opportunities
REO properties are listed across a variety of platforms, including multiple listing sites (MLS) and government disposition portals. Buyers can look for:
- Local MLS listings flagged as REO or “bank-owned”
- Government REOs like HUD Homes, VA Homes, USDA and Fannie Mae HomePath®
- Auctions and distressed-property platforms
- Real estate agents experienced in foreclosure acquisitions
- Lenders like Newrez (requires pre-approval)
3. Conducting Due Diligence: Researching Property Condition and Value
REO homes are frequently sold “as-is,” meaning no repairs will be made prior to the sale. An REO home may need significant repairs. In order for the buyer to feel confident they’re getting a cost-effective deal, they might want to enlist the help of a real estate agent, an attorney and other real estate professionals.
Due diligence could include:
- Reviewing past MLS listings for property history, title reports and HOA status
- Studying neighborhood sales and trends
- Comparing an estimate of after-repair value (ARV)
- Evaluating potential renovations required for financing, depending on the type of loan you pursue
4. Inspecting the Property: Must-Do Steps for REO Buyers
Banks may allow inspections after the offer is accepted, giving the buyer a window to figure out how much any necessary repairs might cost. Keep in mind, some REO properties may have been neglected or vacant for long periods.
Key inspection categories include but are not limited to:
- Foundation, roof, electrical and plumbing
- HVAC performance, insulation and structural condition
- Safety issues, mold, water damage or vandalism
- Code compliance and potential permitting needs
5. Making an Offer on an REO Home
Purchasing an REO property might be trickier than buying a home sold by a traditional seller. Buyers may need to put it in writing that they’re willing to buy the home “as is.” In some cases, buyers may be able to include a contingency clause in the purchase and sale agreement that protects them in case they discover that the property needs much more renovation than initially anticipated. However, some entities like HUD will want to utilize their own purchase and sale agreements.
Buyers may need to make a competitive offer on the home right out of the gate, and provide clear evidence of financial stability (such as a pre-approval letter). They may face competition from investors or cash buyers, so making a fully-packaged offer is critical.
6. Negotiating Terms: How Selling Entities Respond to REO Offers
Banks and lenders typically use asset managers who follow structured guidelines. Selling entities may prioritize getting the best deal they can while ensuring they can close on time without any hiccups. This could mean the buyer has to minimize the number of contingencies they attach to their offer so the deal can close quickly. Be aware that with a corporate seller there may be extended timeframes for receiving counters or approvals on your offer.
7. Reviewing Documents and Unique REO Contracts
After an offer is accepted, be prepared for the selling entity to require signatures on documents that may include:
- Special Seller’s Addendum to the contract
- As-is condition disclosures
- Waivers of seller responsibility for repairs
- Required closing timelines
- Penalties for buyer delays
- Special provisions related to utilities, access or occupancy
8. Potential Loan Types for an REO
Selling entities sometimes prefer cash offers since they may shorten the closing timeline, but lender financing may still be on the table if your offer is strong.
Because REO properties often require renovations post-purchase, it might be a good idea to explore getting a renovation loan. Several government entities offer loans that roll renovation costs in with a monthly mortgage payment:
- FHA 203(k) Rehabilitation Loan: Flexible qualifying criteria. Allows for two levels: Limited and full, depending on how extensive the needed repairs are.
- VA Renovation Loan: Available to Veterans and Active-Duty Military. Zero down payment for borrowers with full entitlement.
- Homestyle or CHOICERenovation®: Conventional loans that can also cover second homes and investment properties.
Learn more about our renovation loan offerings here.
The Bottom Line
If you’re curious about getting an REO home because you think those properties could be priced favorably, be aware that that’s true only some of the time, and oftentimes these homes are in need of considerable renovations. Also be mindful that negotiations with banks may require you to have your financing sorted out quickly and move through the process on a tight timeline. Buying an REO home could be a good fit if you’re an experienced buyer who is comfortable making renovations.
Curious about what loan product might suit you best? Our mortgage experts want to hear from you.
Fannie Mae Homepath® is a registered trademark of the Federal National Mortgage Association. CHOICERenovation® is a registered trademark of the Federal Home Loan Mortgage Corporation.
