REO stands for "real estate owned," as in owned by a lender, and buying an REO property can be very different from typical "arms length" real estate transactions and conditions. While it is true that some excellent bargains can be had by purchasing bank REO property, there are also a number of questions to be answered before a casual buyer becomes involved. Here are a few of those questions:
Should you consider buying a house at foreclosure, before it becomes a bank REO property? Then this question is critical. If you're thinking about another REO property, one that has already been foreclosed on, you still need to know its condition. Most REOs need major TLC to improve their condition and many may need extensive and expensive repairs (heating systems, roof, termite removal, new appliances). Former owners were unable to afford the mortgage payments. It is understandable that most were even less financially able to perform required maintenance, repairs or needed improvements. Your perceived "bargain" many become anything but a good deal.
Like the above noted concern, former homeowners unable to afford mortgage payments may also have liens that cannot be eliminated through foreclosure, such as IRS tax liens. Even serious problems with the "chain of title" sometimes occur, making it difficult to obtain a "clear" title without spending large dollars. Whether you're considering using a bank REO property for your primary residence or to rehab and resell it to another for a healthy profit, you'll need to have an unencumbered title to enjoy true property ownership.
Having a good idea of a property's fair market value, or FMV, "as is" is critical to your interest in making a purchase offer. Trying to estimate the value of a bank REO property "as is" may prove challenging. Compiling some asking or recent selling prices of similar homes in the same neighborhood will probably not give you useful information. These homes are being sold as "arms length" transactions (the amount a willing, informed buyer will pay for a property). Buying a foreclosed or REO property can be very different because of deficient physical condition or title problems. Seek the advice of a real estate agent before you move ahead.