What Is REO Foreclosure?

A real estate owned property, or REO, has reverted back to the lender due to nonpayment of the mortgage. The lure of buying a home or property at below-market value makes REO properties an exciting prospect. Understanding what foreclosure and REO properties are all about is key to finding and bidding on a property that turns out to be a solid investment.

Going Into Foreclosure

When a mortgagee is unable to make payments on their property, the lender puts the property into foreclosure, with the ultimate aim of selling it at auction. The lender wants to recoup the unpaid loan amount, along with accrued interest and foreclosure and attorney fees, so the bank may list the house at a price higher than what is selling in the area. When the house is listed in an auction along with other foreclosed properties, the property's high price may result in no bids. Buying a foreclosure home could be a good or bad deal, but you won't know until after you win the auction because walkthroughs generally are not allowed prior to bidding.

Turning Into An REO

When a property doesn't sell at a foreclosure auction, ownership reverts back to the bank. That's when the property becomes known as REO. The bank then has the responsibility of prepping the property for sale, including removing the occupants of the home, taking care of liens and deciding on a listing price, says Realtor.com. Once everything is ready, the lender lists the house with a real estate broker or their own real estate sales unit.

Bidding Process

Once the property is listed, the bidding starts. If an REO property generates more than one bid, the bank may put out a "last bid" call. This means you may want to boost your bid as close to the asking price as possible in order to be the highest bidder. High cash bids are also most likely to win than offers that require financing, says the Pacific Northwest Realty Group, a real estate firm located in Washington.

Tips for Buying

Buying an REO property requires due diligence. Know your budget, and get your financing in place before you bid. When you find an REO you're interested in, compare the property to what else sold in the area, suggests Freddie Mac. If the listing price is comparable to area sales, make a bid that's close to the listing price.

Make sure you or your real estate agent include a clause in your offer that's contingent on a full inspection of the property. You then can rescind your offer if there are repairs or damage that make the deal a bad one for you. Don't expect a quick answer from the bank about your offer. Getting approval or a counteroffer from the lender can take anywhere from days to weeks.