How to Buy an REO, Like It's Almost a Steal

If you want a bargain, forget the home-buying process you learned from others.

The housing market is a depressing subject for homeowners but exciting for those looking to purchase now.

But getting a steal isn’t as simple as it might sound. It requires some homework. It also requires something that isn’t part of the traditional home buying process: speed. YES you will have to act very fast once you spot a deal.

Now let’s explore two options for buying houses well bellow market. Each has different obstacles.

Buying a foreclosure at judicial auction (as opposed to the heavily-advertised public auctions you see at sites like auction.com) will often net the lowest price. But buying this way isn’t anything like the typical process.

Buying REOs at Auctions

1. Auctions often require a 5% to 10% deposit before you can start bidding.
2. Once you win, you need to pay in full, typically within 24 hours. Which means, of course, there’s no time to get a loan from your bank. And if you don’t show up with the money? Say goodbye do your deposit.
3. Most of the time it is impossible to do more than a drive-by inspection. Many homes sold at foreclosure auctions are still occupied, so there’s no opportunity to even see the inside, much less do a thorough inspection of the roof, foundation, heating and air conditioning, etc.
4. Depending on the state where the auction is held, you may face liens on the property. There is a story where one woman almost paid $14,000 for a foreclosure property that came with an outstanding $140,000 bill. You can avoid this by paying $10-400 for a title search on the property before you bid, but that’s more money up front with no guarantee of winning the house.
5. The competition for these houses is often fierce. You could be bidding against other investors with a lot more time, expertise, and cash than you’re bringing to the table.

Real estate owned properties (REOs)

When a bank assumes ownership of a house through the foreclosure process, it becomes what’s known as a “real estate owned” property, or REO. Since banks are in the business of lending money, not managing property, they often want to get rid of these homes as fast as possible. They sell their properties the same way you’d sell yours: They hire a specialized real estate agent and list it. Unlike the way you’d market your home, however, the bank often does nothing to fix it up. They list it as-is, and to facilitate a quick sale, sometimes price it well below the market. But sometimes they will be willing to fix them to put them back on the market for an even quicker sale.

The REO market can get you a steal, but you cannot approach it with the same slow, methodical process you’d use in the traditional home-buying process. How it’s done:

1. Learn to spot a deal when you see one. Buying a home cheap means knowing what “cheap” is. When a below-market REO comes on the market, you’re going to have to make a very fast decision as you won't be the only one to spot it. So learn values beforehand and find an agent that can help you spot an REO and get you the comparables so you know how much bellow market it is priced.
2. Be pre-approved for a mortgage. Be ready to pay for a bargain when you find one. That means having financing pre-approved.
3. Be ready to pounce. “If it’s new on the market, it’s not something you can sleep on for a few days. By then, there will be several offers and it’s a bidding war. If you think you’ve found a bargain, put an offer immediately because “it’s important to control the property before worrying about the details. If the bank accepts your offer that includes a clause making it contingent on an inspection, you’ve “locked up” the property without being on the hook. Once you get it locked up, you can go through due diligence and if you think you overpaid you can back away. When you put your offer, ask for the bank to get back to you with an answer within 24 hours.
4. Bid as high as you’re willing to go. The rules for buying an REO are nearly opposite those for buying a home the traditional way. Grimes says, “It’s not about how much under asking price you should offer, it’s really how much over asking price you should offer,” because the competition for bargain homes is fierce. How high do you need to go? If you want to get it, you will have to make the strongest offer first. If you don't and you're outbidded, then you will have to find another REO.

 

So, can you find a housing steal? Depending on where you’re looking, absolutely. But this isn’t the traditional house-buying process.