Bank owned properties consist of foreclosure real estate that did not sell through public auction and has been returned to the lender. This type of real estate goes by a variety of names including real estate owned, reo homes, and bank foreclosures.
Once real estate becomes bank owned it is placed for sale through the lender’s loss mitigation department or local independent realtors. Most banks and real estate agents provide foreclosure lists or provide property listings on their company websites.
When banks list reo homes for sale, buyers submit offers to bank loss mitigators who handle all aspects of the transaction. When real estate agents list bank owned properties, buyers submit offers to the representing agent who presents the offer to the lender holding title to the property.
Bank owned real estate can consist of residential and commercial real estate, as well as vacant land. Most bank foreclosures are priced below market value. REO properties are typically discounted between 10- and 20-percent of the appraised value. Buyers should be prepared to offer the full asking price as banks rarely reduce prices unless significant repairs are revealed during property inspections.
When real estate is placed for sale through foreclosure auctions buyers must submit funds within 24 hours upon acceptance of their purchase offer. When tax or creditor liens are attached, buyers must enter into negotiation with creditors, the IRS, or state tax assessors to remove liens. If evicted property owners refuse to vacate the premises, buyers are responsible for initiating eviction and associated costs.
Once foreclosure real estate is returned to mortgage lenders the bank removes liens and handles the eviction process. These costs are added to the purchase price. Although bank owned foreclosures typically are priced higher than auction foreclosures, all the time consuming and costly details have been taken care of. Buyers can quickly take possession of the property; allowing them to move into the home or place it on the market for rent or sale.
Many of the bank owned homes offered for sale through lenders are located in neighborhoods with multiple foreclosures. The Department of Housing and Urban Development (HUD) created the Neighborhood Stabilization Program which provides grant money to purchase homes and rebuild communities.
NSP grants are offered to individual buyers and real estate investors. Individuals can apply for one NSP grant, while investors can apply for a maximum of five NSP grants. Prospective buyers must apply for grant money through local NSP offices. Eligibility requirements and criteria for receiving grant money to purchase distressed properties is available at HUD.gov.
Buyers who have never purchased bank owned real estate must take time to understand the advantages and disadvantages, as well as the various types of financing options and available grant programs. The HUD website provides a section dedicated to the process of buying bank owned real estate. Many real estate agents offer seminars to help buyers become familiar with the process and address potential pitfalls of buying foreclosure homes. Most mortgage lenders require borrowers to obtain preapproved financing prior to submitting offers on bank owned properties.
Bank owned homes can be used as a primary residence, vacation home, rental property, or for investment purposes. Many investors purchase foreclosure real estate for use as rent-to-own, lease options, short- and long-term rentals, vacation rentals, and for 1031 exchanges.
One option for locating cheap homes for sale is to seek out real estate investors who specialize in buying bank owned foreclosure portfolios. Some investors and investment groups buy mortgage portfolios consisting of dozens of properties.
Bank portfolios are often sold to investors at wholesale prices; allowing investors to save upwards of 40-percent. When real estate investors purchase foreclosure properties at wholesale prices they pass along part of their savings to buyers; creating a win-win for all parties involved.