An REO, or real estate owned property, goes back to the lender after the home is put up at auction and has been unsuccessful in getting the requested bid. Some foreclosed homes at auction don’t get any bids, because there isn’t any equity in the home or even enough to pay off the mortgage. If an investor decides to bid on a foreclosure, he has to have a cashier’s check in the full amount of his bid. If the investor is successful in his bid, he will take ownership of the property in an “as is” condition, including any unpaid property taxes, repairs and liens on the property.

If the foreclosure auction is unsuccessful in finding a buyer for the foreclosed property, the property comes back to the lender without a mortgage. The bank then has to negotiate with the IRS if there are tax liens on the property, as well as pay off any association dues. In order to sell the property, they may occasionally have to make repairs, but they don’t usually do this. The foreclosure investor who purchases the property will have the opportunity before closing to investigate the property and will get a title insurance policy at closing. Remember, bank owned properties are not always a good bargain. Take all things into consideration when buying an REO, including the selling price of other homes in the neighborhood and the cost of any repairs that may have to be made.

Don’t forget that the lenders want to receive the highest possible price for the foreclosed homes to help offset their losses on the mortgage. Lenders have no interest in selling these properties cheaply just to get rid of them. If an investor makes an offer on an REO, the lender will usually come back with a counter offer, which may not be the price that the investor expects to pay. The lender has to get as much as possible from the sale to satisfy their auditors and investors. Of course, the investor can always make a counter offer to the lender’s counter offer.

After the investor’s offer is made to the lender, it will have to be reviewed by several people before final approval. Since most lenders will not do any repairs on REO properties, the investor should always include an inspection contingency in his offer to allow him to look over the property for any hidden costs, such as major repairs, etc. Occasionally, the lender will renegotiate the price to avoid losing the sale and having to start all over.

The investor must have his financing arranged or be ready to pay cash, since the lenders will not provide financing on their REO’s. The investor should provide the listing agent with either proof of the cash or a pre-qualification letter from their lender prior to submitting an offer..

The advantage to buying an REO property instead of a short sale property is that short sales can take several months to close, and REO properties can close in a couple weeks. Investors can make nice profits off both short sales and REO properties, but all costs to the investor should be considered before making an offer.