What Are REO Properties?
REO stands for "Real Estate Owned"—a term used when a bank or lender takes ownership of a property after an unsuccessful foreclosure auction. When no bidder meets the minimum bid at a foreclosure sale, the lending institution becomes the property owner.
These bank-owned properties represent some of the best opportunities in real estate investing. Banks are motivated sellers—they're in the business of lending money, not managing real estate portfolios. This motivation often translates to favorable pricing and terms for savvy buyers.
Why Banks Sell REO Properties Below Market Value
Banks have several compelling reasons to sell REO properties quickly, often at discounts:
Carrying Costs Add Up
Every month a bank holds a property, they incur expenses:
- Property taxes
- Insurance premiums
- Maintenance and repairs
- HOA fees (if applicable)
- Security costs for vacant properties
- Lost opportunity cost on capital
Regulatory Pressure
Federal regulators encourage banks to minimize their REO holdings. Large REO portfolios can affect a bank's regulatory standing and capital requirements.
Not Their Core Business
Banks make money by lending, not by owning and managing real estate. Every REO property represents a non-performing asset that ties up capital better deployed elsewhere.
Advantages of Buying REO Properties
1. Clear Title
Unlike auction purchases, REO properties typically come with clear title. Banks resolve most liens and encumbrances before listing, reducing your risk of surprise claims.
2. Inspection Opportunities
You can usually conduct full property inspections before buying. This is a significant advantage over auction purchases where you often buy sight-unseen.
3. Financing Options
Many REO properties qualify for conventional financing, FHA loans, or even special programs offered by the selling bank. Some banks offer in-house financing with competitive terms.
4. Room for Negotiation
Banks expect negotiation. Starting offers 10-20% below list price are common, and banks often counter rather than reject outright.
5. Professional Transaction
You're dealing with a corporate entity, not an emotional homeowner. Negotiations are typically businesslike and predictable.
How to Find REO Properties
Bank REO Departments
Major banks maintain dedicated REO departments and websites:
- Bank of America: REO inventory listed on their HomeBase website
- Wells Fargo: Properties listed through REO.com partnership
- Chase: Bank-owned properties on their real estate section
- Fannie Mae: HomePath.com for government-backed REOs
- Freddie Mac: HomeSteps.com listings
Foreclosure Data Services
Comprehensive foreclosure databases aggregate REO listings from multiple sources, giving you:
- Daily updated inventory across all 50 states
- Property details including valuations and owner information
- Direct links to listings and auction schedules
- Historical data to identify pricing trends
MLS Listings
Many REO properties are listed on the Multiple Listing Service. Look for indicators like:
- "Bank-owned" or "REO" in the listing description
- Corporate seller names (often the bank or a subsidiary)
- "As-is" sale terms
- Short response timeframes
Asset Management Companies
Banks often contract with asset managers to handle REO sales:
- Ocwen
- Altisource
- ServiceLink
- Auction.com
These companies may have exclusive listings not available elsewhere.
The REO Purchase Process
Step 1: Pre-Approval
Get financing pre-approved before making offers. Banks take pre-approved buyers more seriously and may prioritize your offer over others.
Step 2: Property Research
Before visiting a property:
- Research comparable sales in the area
- Check the property's foreclosure history
- Review any available inspection reports
- Verify current tax status and any outstanding assessments
Step 3: Property Inspection
Schedule a thorough inspection covering:
- Structural integrity
- Roof condition
- HVAC systems
- Plumbing and electrical
- Foundation issues
- Pest damage
REO properties often sit vacant, leading to maintenance issues. Budget accordingly.
Step 4: Submit Your Offer
REO offers typically require:
- Completed purchase agreement
- Proof of funds or pre-approval letter
- Earnest money deposit (usually 1-3%)
- "As-is" acknowledgment
- Specific contingency timeframes
Step 5: Bank Review
Banks may take 3-10 business days to respond. During this time:
- Your offer goes through multiple approval layers
- The bank may order an updated appraisal
- Asset managers compare your offer against others
Step 6: Counter-Offers and Negotiation
Expect at least one counter-offer. Banks commonly negotiate on:
- Purchase price
- Closing timeline
- Earnest money amount
- Contingency periods
- Closing cost credits
Step 7: Due Diligence Period
Once under contract, you'll have a defined period (typically 10-17 days) to:
- Complete inspections
- Finalize financing
- Review title commitment
- Verify property boundaries and easements
Step 8: Closing
REO closings are similar to standard transactions, with a few differences:
- Banks often use their preferred title companies
- Seller disclosures may be limited ("as-is" sales)
- Banks rarely make repairs; negotiate price credits instead
Negotiation Strategies for REO Properties
Know the Bank's Timeline
Properties on the market longer than 90 days signal motivated sellers. Banks track "days on market" carefully and may accept lower offers on aged inventory.
Research the BPO
Banks order Broker Price Opinions (BPOs) to value properties. Understanding how BPOs work helps you craft competitive offers:
- BPOs consider recent comparable sales
- Condition adjustments affect value
- Banks typically list at or slightly above BPO value
Multiple Offer Scenarios
In competitive markets, structure your offer to stand out:
- Larger earnest money deposits show commitment
- Shorter contingency periods reduce bank risk
- Flexible closing dates accommodate bank timelines
- Cash offers eliminate financing uncertainty
Escalation Clauses
Consider including an escalation clause that automatically increases your offer up to a maximum if competing bids come in higher.
Request Closing Cost Credits
Instead of lowering the price, ask for closing cost credits. Banks may prefer this structure as it keeps the recorded sale price higher.
Common REO Buying Mistakes
1. Lowball Offers on Fresh Listings
Banks are less flexible on newly listed properties. Save aggressive offers for aged inventory.
2. Ignoring Addendum Requirements
Banks use specific addendums that override standard contract terms. Read every document carefully—there's no negotiating these forms.
3. Missing Deadlines
REO contracts have strict timelines. Missing a single deadline can void your contract with no recourse.
4. Underestimating Repairs
Vacant properties deteriorate quickly. Add 20-30% to initial repair estimates as a buffer.
5. Skipping Title Insurance
Even though banks typically clear title, always purchase owner's title insurance. It's inexpensive protection against undiscovered claims.
REO Investment Strategies
Fix and Flip
REO properties often need significant work, making them ideal for renovation projects:
- Buy at 65-70% of ARV minus repairs
- Complete renovations efficiently
- Sell to retail buyers at market value
Buy and Hold
Long-term rental properties generate passive income:
- Look for REOs in stable rental markets
- Calculate cash-on-cash returns before buying
- Factor in property management costs
Wholesale
Assign your contract to another investor:
- Build a buyers list before making offers
- Focus on properties with clear value-add potential
- Negotiate assignment-friendly contract terms
Owner Occupant
Live in the property while building equity:
- Access better financing terms (FHA, conventional)
- Qualify for homebuyer assistance programs
- Some REO programs prioritize owner-occupants
Market Timing and REO Inventory
REO inventory fluctuates with economic conditions:
High Inventory Periods
- Economic downturns increase foreclosures
- More properties mean better selection
- Increased competition from other investors
Low Inventory Periods
- Strong economies reduce foreclosures
- Fewer properties but less competition
- Banks may be more negotiable on remaining inventory
Regardless of market conditions, opportunities exist for prepared buyers who understand the process and act decisively.
Getting Started with REO Investing
REO properties offer a more structured path into foreclosure investing compared to auction purchases. The ability to inspect properties, secure financing, and negotiate terms makes them accessible to investors at all experience levels.
Action steps to begin:
- Set up property alerts: Monitor new REO listings daily
- Build bank relationships: Register with major bank REO portals
- Assemble your team: Find agents experienced with REO transactions
- Get pre-approved: Have financing ready before you find your property
- Start making offers: Experience is the best teacher
The REO market rewards informed, prepared buyers who move quickly when opportunities arise. With consistent effort and the right data, you can build a profitable portfolio of bank-owned properties.
Looking for REO properties? Browse our database of bank-owned homes from all 50 states, updated daily with property details, valuations, and direct listing links.