What is an REO?
When a borrower has skipped a number (usually 3) of mortgage payments the lender records a notice of default against the property and the lender expects the borrower to satisfy this debt. If this does not happen, then the lender forecloses on the mortgage and proceeds to set up a trustee sale. If the property does not get sold in the foreclosure auction then the property goes back to the mortgage company and it becomes an REO (Real Estate Owned) property. Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale.

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 other liens against the property.

It is also expected that you previously did your homework running your own inspections to make sure that the property is in ok condition. You won't get any contingency period.
How banks sell REOs?
The bank now owns the property and the mortgage loan no longer exists. The bank is not interested in keeping the property, so they need to sell it. Since the bank is not in the Real Estate business, they request the help of a team in order to:
  • Handle evictions when necessary
  • Secure and manage the property while it gets sold
  • Remove the liens and pay off any homeowner’s association dues, so you receive a property free and clear
  • Do some repairs (if authorized by the bank)
Considerations during the buying process
Each bank has a specific procedure when selling REOs, but they all have similar goals:
  • Be realistic when writing your offer, the bank wants to get the best price possible.
  • They sell properties in "as is" condition.
  • They allow you to get all the inspections you want at your expense.
  • The property is owned by a corporation (soemtimes even abroad) and it may take a couple of days for them to reply to your offer or send you back any document signed by them
  • The banks have never lived in the property, therefore the disclosures that they can provide are minimum
  • The banks expect you to close in the agreed time, ask help to your agent and lender on expediting the process