Real estate owned properties (REOs) by definition are properties that have been purchased by a bank or the lender who foreclosed on the original loan. Lenders often buy these homes and properties when the bids received at auction were not higher than the default amount on the loan. The phrase "buying from the bank" is often associated with this type of sale. But in actuality, in addition to the bank, an REO can be purchased from a variety of other institutions including credit unions, finance companies, mortgage companies, and other businesses and corporations that lend money.
Selling these properties can be profitable for bother the buyer and the lender. Both parties can benefit from the transaction. There is a common misconception that the lender does not stand to make a profit from a property that has been foreclosed on considering the loan is in default. This is not true. Although a lender cannot officially make a profit when the home or property is in foreclosure, they definitely can once they make the transition from lender to new owner. As the new owner of the property, the lender has the ability do what ever they want with it, whether that means selling it for a determined price where they can make a profit, holding on to it and possibly selling it for a better price at a later time, or renting it out.
There are several advantages that buying REOs has to offer to the buyer as well when compared with the purchasing of foreclosures or auction properties. First of all, there is much less time and effort involved with this type of transaction. With the exception of any existing tax related issues, liens and other encumbrances are usually already been removed as the lender is the entity that holds the primary lien.
Buyers also have the option of putting their financing in place because unlike purchasing a foreclosure, the deal does not have an all cash payment requirement. There is also the opportunity to make less of a down payment with REO purchases. Lenders have a greater willingness to work with potential buyers because they are eager to get the property off of their hands. Lenders sometimes go the extra mile and offer incentives to new buyers. Closing costs could be waved, reduced interest rates may be offered, and an initial down payment amount needed could be substantially less than the traditional ten to twenty percent amount.
Knowing the advantages is great, but it is also advisable to be aware of the disadvantage as well. Although there is minimal risk involved with REO purchases, it does exist. When compared to other sales, the profit margin may not be as great as it would be with a typical foreclosure sale. This is not always the case, but generally, if a property sells for less, the profit is less for both of the parties involved. These deals are usually made for about ten to twenty percent less than the market value of the property. The condition of the property can also be an issue. The best thing to do is physically see the property and have it inspected. A buyer can pretty much assume that he/she is going into the deal with the property being sold in "as is" condition. Minimal repairs have probably already been completed, so as the new homeowner, you are pretty much responsible for taking care of any other repairs and renovations.
The REO process can also be more consuming than the fast paced frenzy sales made at a public auction or negotiating a pre-foreclosure agreement with a homeowner. Dealing with lenders usually involves some red tape and working with several different people in several different departments in order to cut through it. Negotiating an REO can take several months, but in the end, the profit to be made is usually worth it.