The process of buying a home is exciting, but it can be very expensive. Thankfully, there are plenty of nontraditional listing options home buyers can look into that won’t break the bank. One such option for interested buyers to consider is a real estate owned (REO) home.
What Are REO Properties?
Real estate owned properties are homes that have fallen under the ownership of a mortgage lender or investor. There are several ways this can happen, but a home doesn’t automatically become REO once a lender takes possession. In order to recoup losses and get rid of the property in short order, a lender will first try to sell the home at auction.
Unfortunately for the lender or investor, though, properties often don’t sell at auction. There are multiple reasons for this, the biggest one being that many homeowners go into foreclosure because more is owed on the house than it’s worth, often because of a market downturn.
The foreclosure process is also very costly and can involve attorney fees as well as the cost of seizing and securing the property. When the lender then tries to sell that property, they have to price above actual market value in order to recover the balance and their costs.
If the lender who took possession of the home can’t sell the property at an auction, then the lender takes over ownership of the home. The lender then tries to sell the real estate owned property to minimize its losses.
At that point, it becomes an REO property that often stays on the lender’s books for a while.
How Does A Property Gain REO Status?
Although REO properties often arise out of the foreclosure process – when a homeowner is unable to make their mortgage payments – the terms “REO” and “foreclosure” aren’t synonymous.
REO status might also be the result of a home being given back to the lender after the previous owner moved out or passed away at the end of a reverse mortgage. If the heirs are unwilling to pay off the mortgage balance, refinance the home or sell it themselves, they can give the property back to the lender or investor.
Pros And Cons Of REO Properties
There are benefits and drawbacks to buying an REO property that ought to be considered.
Buying an REO home can be a good idea because houses are usually priced low. The lender wants a hassle-free process and typically hopes to create some competition among buyers. To do this, lenders will often list the home at a lower price, drumming up multiple offers and giving themselves the ability to choose the least risky option.
Although the low price point of an REO property can be appealing for home buyers, these types of homes often need repairs. The lender usually won’t pay for the repairs because they don’t want to spend any more money than they already have on the property.
These homes are often sold as-is, cobwebs and all.
Buying An REO Property
If you’re looking to buy an REO home, how do you find one and how do you know how much you can afford? Let’s break it down.
Where To Find REO Listings
A good place to start when looking for an REO property is to search publicly available listings from the Department of Housing and Urban Development (HUD) and other federal agencies, including the Department of Veterans Affairs, the Department of Agriculture, and the IRS. In addition to the listings of the federal government itself, you can also search listings from Fannie Mae and Freddie Mac, which are government-sponsored entities (GSE).
Large banks may prefer to make a loan and hold onto it for 15 or 30 years rather than selling it to mortgage investors and including it in a mortgage-backed security (MBS). In these cases, the banks may have their own online listings where you can search through for REO properties they’ve repossessed.
How To Make A Strong Offer
Since they want to get the listing off their books as soon as possible, the lender or investor selling the REO property will want to be confident the deal is going to go through right away.
To make your offer stand out, we recommend coupling it with a strong mortgage approval. With Quicken Loans®’ Verified ApprovalSM, we will pull your credit and determine what loan options you may qualify for.
We’ll also ask you to share documentation on your income and assets, usually in the form of tax returns, W-2s, pay stubs, and bank statements. Within 24 hours of receiving the required documents, our team will decide on your Verified Approval.
We use these documents to determine your debt-to-income ratio (DTI), which gives us a picture of the monthly mortgage payment you can afford. Because it’s verified, the listing agent can feel confident that your deal will go through.
It’s the next best thing to a cash offer. You should also feel extremely confident in your offer, and we’ll back it up. If your mortgage loan doesn’t close through no fault of your own after getting a Verified Approval, we’ll give you $1,000.1
It’s important to note that any mortgage approval you get will show you the very top end of what you can afford. The reason for this is that it gives you room to increase your offer if you get into a bidding war, but it’s important to not start out by looking at homes at the top end.
Other Things To Consider When Buying An REO Home
In addition to finding listings and strengthening your offer once you find an REO home you like, there are a few other important factors to keep in mind when deciding whether to purchase the property. Consider the following things in order to determine whether a particular REO property is right for you:
Getting A Real Estate Agent With REO Experience
When you’re looking at foreclosures and other investor-owned properties, it’s helpful to work with someone who’s familiar with the REO market because these properties have their own peculiarities. Here’s what you can expect from an experienced agent:
- They’ll know how to structure an offer that looks most pleasing to a lender or investor.
- They’ll know what they expect to see in the offer and, just as importantly, what they don’t.
- They’ll probably have some experience in telling home buyers what needs to be done to make the house livable.
Our friends over at Rocket HomesSM can help match you with a real estate agent who understands your goals as well as your budget.
Getting A Home Inspection
A home inspection is key when it comes to buying an REO property. Although the lender or investor is unlikely to fix any problems that come out of the inspection, it’s still important to get one done.
With a home inspection, you’ll find out anything that’s wrong with the house before you move into it, and you’ll have a better sense of what questions to ask the seller before completing the transaction.
If there are any absolute deal breakers regarding repairs, you’ll be able to back out of the deal before purchasing and only lose your deposit. If you and your real estate agent can get the investor to agree to an inspection contingency, you might not even lose that.
Understanding General Vs. Special Warranty Deeds
In most home sales, there is typically a general warranty deed. A general warranty deed tells you a couple of things:
- The seller has the right to sell you the property as they currently own it.
- There are no other legal issues or claims to the property by anyone other than the seller.
If you get a general warranty deed, no one can claim issues with your title from before you owned the property. The general warranty deed also lets you know that there are no liens and that the property is owned free and clear by the seller.
However, with an REO sale you may not be able to get a general warranty deed. In this situation, it’s common to instead receive a special warranty deed. In this instance, “special” doesn’t mean “better.”
With a special warranty deed, the mortgage investor is likely to only guarantee that there are no additional title issues that have been created since they took over ownership. Although they have the right to sell the property, they can’t promise against other pre-existing title issues or liens.
For this reason, it’s important to take precautions when purchasing an REO property.
Considering Whether To Buy An Owner’s Title Policy
One thing you might consider with an REO property is buying an owner’s title policy. You’re required to get a lender’s title policy, which protects the lender’s investment should there be another ownership claim against your home. But taking the extra step to get an owner’s title policy protects your investment against any preexisting claims on the property.
The owner’s title policy could be helpful when buying an REO property, as many of the available properties have been foreclosed on. This means previous owners probably had financial trouble and you may have to worry about tax liens or judgments on the property.
Having an owner’s title policy could help you if anything comes up.
REO properties can be a great option for home buyers with a lower budget and a willingness to make a few repairs. It’s important for any interested buyer to do their research and consult with experts before purchasing a property. You need to ensure that you’re making the best decision for your needs.
Are you looking at buying an REO home? Consider getting a mortgage approval online through Rocket Mortgage® by Quicken Loans. One of our Home Loan Experts would also be happy to go over your situation if you give us a call at (800) 785-4788.
1 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply. Verified Approval within 24 hours of receipt of all requested documentation.