The Difference Between REO and Foreclosure

Many people assume that buying a home at the foreclosure is the same as buying an REO property, which is "real estate owned" by a bank. In some cases, there may be little difference in price or condition. However, in many situations, there are differences that may influence both the price you must pay and your interest level.

The most important potential difference and consideration is the true "as is" selling price. In some situations, this difference is wide. Here are some issues  to consider.

What Is Foreclosure?

Buying real estate at foreclosure typically means you're purchasing in a total "as is" environment. No warranties or guarantees, either stated or even implied, are available. The first mortgage lender,  sometimes the second and third lender (if they exist), will be present and possibly bidding on the real estate. Lenders, of course, know how much money they want and need from a buyer. That amount typically includes the outstanding balance of the loan, all accrued and unpaid interest and all expenses of the foreclosure process (collection, lawyer, advertising, and filing fees). They have little concern for the condition of the property, including repairs and improvements needed. Except for a brief physical inspection period just prior to the foreclosure auction, you will be buying not only that which you see, but whatever unseen problems the house may have. You also may, or may not, be advised of any title problems, including outstanding liens that cannot be discharged through a foreclosure sale, such as an IRS income tax lien. You'll typically be required to offer a $5,000 or $10,000 certified check on the spot and have a short period to complete the sale.

What Is Real Estate Owned (REO)?

Buying bank REO property is similar, but a bit different. If the bank or mortgage lender becomes the owner of the property, more requirements accrue to the financial institution. They are required to be more forthcoming with potential buyers or real estate agents about the physical condition of the house and to disclose any serious title issues. You'll have a much better idea about the condition of the REO property and, therefore, its "as is" fair market value, or FMV. You should also be able to learn if any non-dischargeable liens still exist. In most cases, bank REO property will have no (or corrected) title issues as the lender will have resolved existing problems. Be aware, however, that the longer a lender has owned an REO property, they have probably had other carrying costs that they'll want to include in the selling price. For example, if the house is vacant, just the insurance alone can cost more than $1,000 per month, since a vacant property has no inhabitants to protect it from damage such as vandalism or fire.

REO vs. Foreclosure

As you can see, buying at foreclosure or as an REO property, a house can be a bargain, a nightmare, or, more probably, somewhere in the middle. If you do your real estate homework regarding "as is" FMVs, physical condition, title issues, and neighborhood desirability and home values, you can enjoy some excellent benefits and profits buying bank REO property.