REO Foreclosures – Worth the Risk Or a Hard Pass?

Are REO Foreclosures Good or No

If your property leads funnel has dried up, and advertising simply isn’t working, you may consider investing in a foreclosed property. If that sounds like you then you’ve likely come across the term REO foreclosures and heard that they are a great way to boost your investment portfolio. But that also leads to questions about the sustainability of REO foreclosures as a way to grow your lead funnel and as a stable business model. 

Are these as risky as a traditional foreclosure? Is there a difference, and should you take the chance of investing in one? We’re here to explain what these types of properties are so that you can make the call.

Below you will find questions and answers related to REO foreclosures to help you make a decision on if they are a good way for you to boost your lead funnel and scale your real estate investing business. 

What is an REO foreclosure?

REO means Real Estate Owned and the term REO Foreclosure refers to a piece of property that is being sold by a bank or lender. A property becomes listed as an REO when it fails to sell at a traditional foreclosure auction. The bank reclaims the property and lists it on the MLS or other conventional real estate listing sites. 

How do REO foreclosures work?

The length of a foreclosure process can vary greatly, and the home usually goes through many stages before it lists as an REO foreclosure. For an in-depth look at some of the foreclosure process stages, you should refer to our guide on the differences between short sale pre-foreclosure and foreclosure

After the property is taken back by the lender, the lender will try to sell the property at a public auction. If no offer is made during the auction or meets the lender’s needs, they will reclaim the property and list it as an REO.

During this period, the lender will typically hire a real estate agent to inspect the property, create a listing, and manage the sale. The process is very similar to when it sells through a private owner. Only instead of an individual owning the property, you are dealing with a lender. 

The Risks With Buying REO Foreclosures

Many new investors conclude that it’s automatically a great deal because the property is listing as a foreclosure. In the case of an REO foreclosure, this assumption can be a significant mistake. 

It’s essential to remember that the lender is no longer treating the property as it would if it were a traditional foreclosure. Instead of selling the home as quickly as possible to break even and recover from their losses, REO specialists and possibly a real estate agent handle the sale. 

The bank’s goal is to sell the property as anyone would. They may list it at market value and are likely to turn away any lowball offers or those that do not meet their expectations after the initial listing. That means you must do your research to find whether it is a low price and not just assume it’s a deal because it’s an REO.

It’s worth knowing that if the property is in living condition or doesn’t have any significant damages, a potential homeowner may purchase the property before the bank is willing to accept lower offers. If the property is in livable condition, homeowners can get an FHA or traditional loan for the property and usually make higher offers than cash buyers or investors. That means it might not stay on the market long enough for you to come in with an offer that makes a sound investment.

Another risk to be aware of is regarding the information the owner is willing to disclose. In most states, the law enforces owners to disclose any issues with the property’s condition either verbally or in writing. The agent or owner may understate issues, or the information you receive regarding the problems can be misleading. Remember that the bank still intends to make their money back as quickly as possible and may overlook being honest.  

Are REO Foreclosures Worth Buying?

Yes, an REO foreclosure is worth buying if you are prepared to put in the effort.

If the home isn’t subject to a seller’s market and you can get as much information on the property’s condition as possible, you minimize the risk of investing. If you do your research ahead of time and wait until the perfect time to make an offer, it can be an excellent investment. 

Professional networking is the best possible way to avoid these risks altogether. Suppose you can establish an excellent professional relationship with an REO specialist at a bank. In that case, they may be able to give you the necessary information to make an offer on a property before it lists as an REO. Or they may also give you the first chance to make an offer when the bank is ready to accept less than the listing price. 

Altogether, you are better off trying to invest in a property at any other stage of the foreclosure process because an REO is usually the same as a traditional sale. Check out our title How to Buy a Foreclosed Home From Start to Finish for more tips on buying foreclosures.

Now that you know all about REO foreclosures, here are some FAQs to help you decide if you should use them as a new source of projects for your real estate investing business.

FAQs about REO Foreclosures

What is the difference between an REO and a regular foreclosure?

A traditional foreclosure will sell at a trustee sale, or public auction, at the courthouse. It becomes an REO if it fails to do so. For investors, the main difference is that foreclosures usually sell for a better price because the bank is motivated to sell it for what is owed, potentially less than market value, while an REO may list at market value. 

Can you rent to own an REO foreclosure?

No, you cannot rent to own an REO foreclosure. The bank is attempting to sell the home to regain what is owed by the previous owner. Their motivation is still to sell the property as quickly as possible and will not rent it out. 

Are REO properties a good deal?

If they are not subject to a seller’s market, and the bank has had the listing up for some time, they may entertain low offers. However, an REO specialist and possibly a real estate agent will handle the sale. The individuals in charge may be motivated to make a profit on top of what is owed. That means it may sell at market value. 

Are REO properties cheaper?

No, not always. Depending on the property’s condition and the bank’s losses, an REO property may or may not be cheaper than other properties. The bank is listing the property to recover losses, but they may list it at market value under an agent’s advice. 

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