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How to Purchase an REO Property in the Buyer's Favor

Updated on August 9, 2011
A few home inspections before buying a house can save you money in the long run.
A few home inspections before buying a house can save you money in the long run. | Source

What is a REO Property?

Buying an REO house, one that is owned by a bank, may be a real deal. But knowing a few things about the house can save from heartache later. An REO is an acronym for "Real Estate Owned." It is where the bank has actual possession of the house. Since most of these houses are sold as-is with no disclosures, it is up to the buyers to do detective work and find out about any hidden problems.

While some banks are unwilling to do any work, any inspections done will need to be disclosed to the next buyer and the banks are more willing to remediate problems before they get bigger. This prevents the house becoming unsuitable by other purchasers, and may end up getting fixed by the bank as they are found. So, while inspections may cost money out of pocket to you, they may end up being a great idea if there are problems hidden in the house.

Of all the foreclosure types, the REO property is the best for the buyer. The title is clear, you don't have to evict any previous homeowners like you possibly would with an auction foreclosure, and the response is generally faster than a short sale.

What You Need To Do Before Buying a REO Property

Beforehand, you will need to assemble a few things. Namely, a list of people you can trust to give you good answers about the house, and a plan to fix anything that needs fixing. You will need to know and have on hand home inspectors and contractors, such as a general home inspector, roof contractor, heating and cooling contractors and landscapers. A mold inspector, if needed, is always a good idea.

First of all, start out with a general home inspection. These generally run between 300 to 500 dollars depending on location and house. These inspectors will go with you room by room, top to bottom and list any features they see that are not working or are in need of repair. If there is a furnace or central air installed, they will also take note of any models that may be under recall. They may not know any more information than just what is general knowledge, but it is a good starting point for other inspections.

After this point, begin with inspections and bids that are free. Call contractors up and see if they will come to the house for free to see how much it will cost to fix. Generally, most contractors will give free bids and will write out everything in detail to try to get your future business. If the home inspector noted a roof leak, the best case scenario is to get three different roofing contractors to come out to the house and to give three different bids. Each will have a different price with different work to be done with different guarantees. Then, if you do purchase the house you'll know what work needs to be done.

Specialized inspections are optional but may be critical. If there was a roof leak that had been repaired, a mold specialist may be advisable to see if any mold has been growing in the walls. A notable sign of mold is a musty smell in a room, black spotting on a wall or a ceiling, or buckling of a floorboard. Remediation is expensive as is the mold inspection, but mold can be a real health issue to those who are sensitive.

Bank owned properties usually have been vacant for some time. Landscaping work will need to be done and trimming of trees and overgrowth will need to be cut back. Take a good long look at all the things that need to be done on the outside of the house.

With all these steps in place and done during the contingency period, the buyer now has the backing to ask for repairs to be done. While most REOs are sold as-is, with inspections and firm bids behind the requests the banks may be more apt to complete the work requested. Banks don't like to sit on vacant properties for long periods of time, and since all inspections are disclosed, any faults will now have to be disclosed in the future making it advantageous for the bank to sell the property and fix the problems.

The Bottom Line For REO Properties

Never offer full price for a bank owned property even though you feel it is way under market. There will always need to be work done to the house and there will always be room for negotiation.

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