How to Buy Bank Owned Foreclosures

Last Updated: December 21, 2021 References

When a bank can't close a foreclosure sale at auction, it sends that property to its inventory. Bank owned foreclosures in inventory are called REOs, or "real estate owned." ^{[1]
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Research source} Banks will give these REOs to asset managers, who will in turn hand them off to realtors. Realtors will then list these foreclosed properties and try to sell them like any other home. Buying an REO can be even simpler than buying a property from a traditional homeowner if you know what to do and have the right strategy.

Steps

1
Start the hunt for REOs. It's possible to be looking for an REO and not be able to distinguish it from another listing. But because banks are often sitting on thousands of houses losing money in inventory, they have an incentive to get rid of them quickly. That's where you come in. Look in three distinct places for REOs in your search: ^{[2]
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- Look on the MLS. The MLS, or Multiple Listing Service, is chock full with REOs. Talk to a local real estate agent about identifying bank owned foreclosures in the MLS.
- Look on bank websites. Some banks will proudly list their REOs on the section of their website dedicated to mortgages and homes.
- Find a foreclosure listing service online. Some foreclosure listing services will make you pay to join, although it's possible to find free ones.
Getting pre-approved for a loan before you go REO-hunting is the most prudent move. Better yet is getting pre-qualified by the bank which is trying to sell the REO — it simplifies things greatly. Some lenders, such as the VA, may offer fewer financing options if the home isn't in move-in condition, so be forewarned. ^{[3]
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3
Decide whether you want to look for discounted properties or not. Because banks are in the business of making money, they price their REOs pretty competitively with the wider market. On the one hand, properties that are discounted will most likely have condition issues, and may experience increased demand. On the other hand, properties with fewer condition issues may be priced at market value, which may or may not defeat the purpose of buying REOs.
- If you're hunting for undiscounted REOs, know that banks have an incentive to clear away houses on inventory. Remember that the bank did not get its minimum bid for the property at auction, so it will most likely dip even lower in order to sell the property quickly.
A little bit of money will go a long ways when it comes to peace of mind. No potential homeowner should waive their right to an inspection, especially with a foreclosed property. ^{[4]
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Research source} A couple hundred dollars can spare you the embarrassment and ruin of needing to potentially shell out $50,000 after you discover that the whole property needs needs re-wiring, for example.
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Do a title search before you close the sale. A title search is a service that you pay for that reveals relevant interests and regulations associated with that property. For example, a title search may reveal a lien being placed on the property, which will need to be paid off at closing. Not knowing about this lien could mean significant added costs to buying the property that you should know about before you close the deal. ^{[5]
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- Other issues that a title search might uncover include restrictions put on the property, such as covenants and easements. Buying a property and then discovering that you can't develop on it because of an easement could make your life a living hell.
Bidding on REOs is different from bidding on a traditional property. For one, homeowners of a traditional property may respond quicker to bids in an effort to sell a home quickly. Banks aren't necessarily like that. They are expected to demonstrate to investors that they tried to make the most money from an REO, which effectively means that they are prone to counterbid on most offers that you make, even if they are respectable ones. The back and forth on these exchanges is likely to be painfully slow, so be prepared.
When the bidding is done and you've got the property, see if the lender is willing to loan you the full price of the foreclosure — something that's more common than you make think. If you have excellent credit, you should be able to reach a good financing option with less money down and an attractive interest rate. Enjoy your new property!

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