An REO property is one that's been foreclosed on and is now owned by the bank.
REO properties fall into two categories:
Move-in condition: The home is in acceptable condition and not in need of rehabilitation. You could buy this property and move in quickly.
Damaged: A damaged REO generally needs repairs and rehabilitation before you can move in. These types of REOs are attractive to investors and some buyers who aren't daunted by the work involved in rehabbing a property. Often, you will get a bigger discount on damaged REO properties, but you have to consider refurbishing costs.
Where can you find REOs for sale?
Banks are eager to sell and get these properties off their books. In most cases, they'll enlist an agent to clean up the property and list it for sale in the MLS, which means you'll find these properties listed alongside homes in the neighborhood that are being sold traditionally.
If you're looking to buy an REO, it's important to work with an agent who has experience with foreclosures. Many times the bank will insist on an "as-is" sale, and an experienced agent can help you work through your decision whether to move forward with the purchase based on the property's refurbishing needs.
Pros of buying REOs:
• Often, you'll pay a below-market price for the property.
• The process is similar to a "normal" home purchase in that you can secure financing using a traditional mortgage. (Buying an REO property is nothing like buying a foreclosure property at auction with cash.)
• You'll be able to do inspections, purchase title insurance and secure financing before completing the purchase.
Cons of buying REOs:
• Many banks will require an "as-is" purchase, and if there are problems or necessary repairs, paying for them is your responsibility.
• Banks rarely accept anything less than the asking price. They've already done a lot of research to come to a price that makes sense for them. (Keep in mind that if most sales in your market are selling above asking price anyway, this point isn't necessarily a con for buying an REO property.)
• The process can take longer than a regular home sale.