How to Buy a Bank-Owned Property or Real Estate Owned

Five steps to finding a bargain

By RealtyTrac | Published: 2/03/2008

Under this buying stage, the lender or bank has taken ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction. REO means "real estate owned" by the lender and indicates the house has already gone through the foreclosure process and has been repossessed by the lender.

The lender usually sells the property to recover the unpaid loan amount and typically clears the title for any buyer. But the potential bargain is often less than a pre-foreclosure or auction property. Here's how to buy bank-owned properties or REOs:

1) Find properties and look at them. At this stage of foreclosure, it's more likely the property will be listed for sale on the Multiple Listing Service (MLS) used by real estate agents, so if you are working with an agent, ask him/her to check the MLS for bank-owned properties. To buy a bank-owned property that's listed on the MLS, contact the listing agent directly. Keep in mind that the potential bargain often diminishes if a listing agent is involved.

You can also contact lenders directly and ask for a list of their REO or bank-owned properties. You'll have to do some digging to find the department or person at the lending company or bank who manages repossessed property. You can also find properties online through services like RealtyTrac.

Once you identify a property, drive by it to get a better idea of its condition and neighborhood. You may find notices posted about the lender who owns the property or signs that show the property is listed with a real estate agent. Take lots of pictures and notes.

2) Check the potential bargain. Gather this information:

• Bank's break-even amount -- includes the unpaid balance of the loan, any fees and costs incurred during the foreclosure process and any other liens the bank had to pay off to take ownership of the property.
• Estimated market value
• Your monthly expenses as a homeowner (mortgage payment, taxes, insurance, repairs, etc.)

Subtract all your costs as a buyer (break-even amount, additional liens, repair costs) from the estimated market value of the property, and use that number as a basis for your offer to the bank. This is all public information so you can research on your own with the county recorder, consult a local real estate agent or use online services like RealtyTrac.com. 

3) Contact the lender to express your interest in seeing the property and making an offer.

If you don't know who owns the house, contact the local property assessor (either through county or city government) and ask who is listed as the owner of the property. The assessor should also have the owner's mailing address. Find your local property assessor here.

• When you call, ask for the REO (real estate owned) department, bank-owned homes department or asset management department. Be patient and persistent. A lender's main focus is lending money, not selling property, so it may take some time to get through to this department.
• If you can't get through by phone, another option is to overnight or fax a letter to the lender stating your interest in the property. To stand out from other letters and requests, you can prove you're a serious buyer and include a check made out to a local escrow company in the amount of a small percentage of the total purchase price. This should be refunded if no transaction takes place.

4) Negotiate a purchase agreement. Once you make contact with the bank's asset manager or REO officer, arrange to walk through the property (with your agent if applicable) to make sure it fits your criteria as a buyer. If both you and the bank agree to proceed, negotiate the terms of the purchase agreement.

NOTE: If you live in a state that allows a redemption period for the owner after the bank takes ownership of the property, you may have to wait several weeks or several months, depending on the state, before the bank is willing to sell the property. During the redemption period, the owner can regain ownership of the property by paying the total amount owed to the bank plus any applicable foreclosure expenses.

The bank's primary goal is to at least break even on all the costs that it has sunk into the property. That includes the unpaid balance of the loan, the expenses associated with the foreclosure proceedings, other liens and repairs to the property.

Your goal as a buyer is to purchase the property below market value, minus any estimated repair costs. This is often possible if you contact the bank quickly and are a prepared buyer ready to make a purchase.

To get a better bargain, consider these:

• Buy the property "as is." More on "as-is" offers.
• Prove you have the financing and can close quickly. Pay with cash or show your pre-approval letter. Be ready to show proof of income.
• Work with lenders that have a glut of foreclosures. These are non-performing assets from their perspective, so unloading them is to their benefit.
• Build relationships. Let the asset manager or REO officer know to contact you in the future if the bank needs to quickly unload foreclosure properties.

5) Close the deal. Once you've arrived at an agreement with the bank, put the agreement in writing. If you're not familiar with how to draw up a purchase agreement, ask a local real estate agent or real estate attorney. The purchase agreement should make closing the deal contingent on 1) a full title search conducted by a title company or attorney and 2) a professional inspection of the property (even if you're willing to buy the home "as is," you may find out there's a foundation problem and choose to end the deal).

An escrow company, which acts as a third party, can manage the transfer of money and property ownership. Assuming that you have your financing secured, this should be a fairly smooth process.

There is no set time frame within which the banks must sell their REOs. However, banks often want to get REOs off their books rapidly. As a result, many REOs sell quickly.