Want to Buy a Bank-Owned Home? Behind the Scenes in an REO Deed Transfer

Real estate owned (REO) homes are properties that were taken back by mortgage lenders. A bank-owned home can be a good deal. These properties tend to be sold for below market value, as lenders don’t like to be stuck with houses.  

Buyers might finance REO purchases using loans backed by Freddie Mac, Fannie Mae, the Department of Veterans Affairs, or the Federal Housing Administration (FHA). A renovation loan can help a buyer by financing necessary repair work along with the purchase itself.

Basically, an REO home may need a lot of work. But it could be a good investment for the right buyer.

Backstory on the REO

How did a home become an REO property? First, the past owner did not keep up with monthly mortgage payments and went into default. The mortgage company made efforts to help the borrower get back on track.

Several months passed. The deed holder couldn’t find a way to work with the lender to save the mortgage. The lender then attempted to sell the home to resolve the debt. This may have involved a short sale or an auction. But the attempt to sell the home and cover the debt was not successful. Then, the lender became the owner of a foreclosed property.

The past owner has moved out, and the home has become bank-owned.

The REO Property Deed

An REO property has already been through foreclosure. That process resolves liens from the title.

Purchasing an REO, at least in theory, means the title is clear of claims and secured debts. Trust but verify, as Ronald Reagan liked to say.

Before you get to closing day, verify with the lender that the home’s title has, indeed, been cleared. You might need to hire a title agent to go over the foreclosure docket and carry out a complete title search.

This is critical, because the buyer of an REO home is not likely to get a general warranty deed with its full-spectrum title guarantees. Instead, the buyer will probably get a special warranty deed. This indicates that a lender will only ensure a clear title with respect to any issues that came up while the bank itself owned the real estate.  

Compare and contrast: the general warranty deed versus the special warranty deed.

Diving In

Where can a would-be buyer start looking? REO properties can be found in obvious places—namely, in the Multiple Listing Services. Find them on the real estate companies’ websites and on Zillow, Redfin, etc. Note that mortgage lending firms may sell REO properties directly to the public, without agents. They make use of their own websites to list these homes. So, look up the bank-owned marketplaces that list these opportunities. (Search term example: “Find bank-owned properties.”)

Check the Department of Housing and Urban Development (HUD) REO home listings online.

You can talk to a lender (example: PennyMac) about financing. Pre-approval from the lender involved in the sale is a particularly efficient way to get started.

And some real estate agents are channels for finding REO properties in a given area. Reviews and word of mouth are also helpful when looking for local guidance. Always vet the agent or lender before finding and vetting the home. A diligent and experienced agent can guide you through the offer and earnest money deposit. You’ll then usually want to have the home inspected. Then, research costs for the needed renovation work.

Negotiating the Purchase  

A buyer for an REO home isn’t going to be negotiating as they would in a regular sale. Here, the seller is an institution. It could be Fannie Mae or Freddie Mac, a government agency, or a bank. Banks and administrative offices have no emotions, relationships, or memories at stake.

Plus, a bank has procedures and timelines to follow. This means it can take longer to get replies to your queries and offers than it would if you had a regular seller.

A lender has three basic goals: sell the home, sell it fast, and sell it in a way that curbs risk.

So, REO contracts and all the administrative hoops are tailored to shield the lender from risk. This is not surprising, given the history and condition of most bank-owned real estate.

Thinking of buying a foreclosed home? Read this first.

Costs and Drawbacks

Your potential new home has likely been sitting empty for a while. And that’s after a long time of possible neglect simply because a past owner was struggling. The past owner might have uninstalled systems and left things broken or carried out unpermitted work in the home. Be sure you know what costs you’re looking at before you close on a mortgage for an REO home.

Another hurdle? Bank-owned properties can attract professional buyers with ready cash. It can be hard for the ordinary buyer to compete in such an environment.

Time is money, too. With all the necessary reviews, the deed can take longer to obtain than it would in a regular sale. You’ll need to expect extra paperwork. You’ll need patience to go through all the nonstandard language on the documents. Go over the purchase addendum and all other documents carefully, relying on your attorney or real estate agent to explain the legalese.

Avoiding Mistakes

To stay on the safe side of REO buying, get an appraiser to verify that the bank’s asking price is fair.

Ask for the lender’s home inspection report. Or have one done. While you’re likely buying the home as-is, you’ll still need the inspection. You’re just not going to negotiate price breaks for repairs the way you would with a regular seller. With an REO purchase, the inspection is strictly informational.

In an REO transaction, the buyer is responsible for the costs of surveys, title work, and transfer stamps. Ask about an inflation endorsement so you’re insured for what the home will be worth when repaired rather than the discounted price.

Ask your agent about including an inspection contingency in your offer to allow for the possibility of walking out of the deal if a serious hazard comes to the surface.

Best-Case Scenario

Bank-owned properties present channels to homeownership. A buyer who successfully restores a home to good working order can live in it, rent it, or sell it for a profit. May the best-case scenario be yours!

Consider this article a starting point. It is not legal or financial advice. Seek professional guidance that fits your location and situation. A diligent real estate agent or attorney—one with experience in bank-owned properties—can get you to your best possible outcome.