The REO Guide: 10 Steps to Buying a Bank-Owned Home

Key Takeaways

• REO homes are bank-owned properties that did not sell at a foreclosure auction
• Bank-owned homes may offer lower purchase prices but often require repairs and are typically sold as-is
• Buyers can often finance REO purchases using conventional, FHA or VA loans
• Thorough inspections, title reviews and lender pre-approval are important steps when buying an REO property

If you’re in the market for a new home, a bank-owned property can be a good option under the right circumstances. When you take the time to understand the Real Estate Owned (REO) process, you might uncover some special opportunities unique to this type of home purchase.

While foreclosed and bank-owned homes often require more renovations — and a different type of negotiation — than other options on the market, they can also come at a significant discount. If you’re willing to work through some of the nuances of the post-foreclosure market, you can set yourself up for a great deal.

What Is a Real Estate Owned Home?

REO, which stands for Real Estate Owned, refers to a property whose ownership has been transferred to a bank or lender after foreclosure. These properties are also commonly referred to as bank-owned homes.

Many REO homes are sold “as is,” which means buyers may need to handle repairs or renovations after closing. However, they may also be priced competitively compared to traditional listings.

What Is an REO Foreclosure?

An REO foreclosure is the stage that follows the foreclosure process, when a home becomes lender-owned after failing to sell at a foreclosure auction. Once the lender takes ownership, the property is usually prepared for resale through standard real estate channels.

For buyers, REO foreclosures can offer a more familiar buying experience than auction properties, often including inspections, financing options and the ability to work with a real estate agent.

What Is a Foreclosed Home?

A foreclosed home is a property that a lender has repossessed due to the homeowner’s failure to make mortgage payments.

When a borrower defaults on their mortgage — typically involving a failure to make payment for more than 120 days without any reasonable resolution — the lender initiates legal proceedings to take property ownership through foreclosure. The home is then typically sold at a public auction to recover the outstanding loan balance. If it doesn’t sell at auction, the property becomes Real Estate Owned (REO) by the lender, who will market and sell it to minimize losses.

How REO Homes, Foreclosures and Bank Owned Homes Differ

A foreclosed home does not automatically become an REO property. It may pass through pre‑foreclosure, short sale and a foreclosure auction first; if it doesn’t sell, only then does it become Real Estate Owned (REO) under the lender’s ownership. Although REO homes are often called foreclosures, they are technically post‑foreclosure properties.

Here’s a breakdown of the different stages of distressed properties:

Pre-Foreclosure (Short Sale) Properties

Homeowners in financial distress may sell the property for less than the mortgage balance, with lender approval. This is called a short sale. Financing is typically accepted, but the process requires negotiations between the buyer, seller and lender, which can be lengthy and uncertain. To avoid any unwelcome surprises, buyers should first thoroughly inspect the property.

Foreclosure Auction

When a homeowner defaults, the property may be sold at a public foreclosure auction. These homes are sold “as-is” to the highest bidder, often requiring immediate payment via cash or cashier’s check. Buyers assume responsibility for any liens or occupants and typically cannot inspect the interior before purchase.

Bank-Owned (REO) Properties

If a property doesn’t sell at auction, it becomes Real Estate Owned (REO) by the lender. Buyers can purchase a post-foreclosure home through traditional real estate channels, often with financing options available. These types of homes are still sold as-is, but lenders may address some major issues to improve marketability.

The asking price may be below market value to facilitate a quick sale, so the lender may be less willing to negotiate further on that amount. However, this can vary depending on market conditions and how long the property has been in the bank’s inventory. The process may also take longer due to bank procedures.

Each purchasing method has its own set of advantages and challenges. Prospective buyers should conduct thorough due diligence and consult real estate professionals to manage these complex transactions.

Pros and Cons of Buying Bank Owned Homes

Purchasing a bank-owned home can be a great opportunity, but it does require careful planning and awareness. Like any other home-buying option, REO properties can come with their own set of benefits and drawbacks.

Advantages

1. Significant savings potential. REO properties are often priced below market value because lenders are motivated to sell and avoid holding inventory.
2. Investment and profit opportunities. Buyers who have the ability to fix up the property at a good value can either transform the home into an ideal living space or benefit from selling the property for a strong return on investment once the repairs are completed.
3. The seller is highly motivated to make a deal. In most cases, you would be dealing with a highly motivated lender who wants to get rid of the property as soon as possible (especially if it’s been on the market for more than 30 days).

Things to Consider

1. Repairs may be significant and expensive. REO properties may have been vacant for extended periods, leading to maintenance issues or damage. Consider the cost to fix the home and deduct it from the apparent initial savings to see if it’s still beneficial for you to buy.
2. Competition can be strong. Bank-owned properties often attract investors and cash buyers, creating a competitive environment.
3. Pricing can vary. The ultimate price may be influenced by factors such as property condition and the bank’s history with the home, requiring thorough evaluation and planning.
4. The process may take longer. REO purchases can involve additional lender review and approval steps, which can extend the timeline.

How to Buy Foreclosed Homes in 10 Steps

The process for buying an REO home is similar to the standard home-buying process, but there are a few key exceptions to keep in mind. Whether you’re buying the home to live in or as an investment, these 10 steps should help set you up for success with bank-owned properties.

Step 1: Browse Available REO Properties

Before you get too deep into the process, it’s best to first look at the properties available in your target market or price range. There are several ways for prospective homebuyers to browse available REO properties:

• Multiple Listing Service. Lenders and real estate agents often use the Multiple Listing Service to list REO properties, making it easy to find options from multiple lenders in one place.
• Real estate agent. A real estate agent will be able to find REO offerings from multiple lenders in your desired area.
• Online services. Other online services offer tools to look up foreclosures by specific characteristics or in certain areas. Some of these tools are free to use, while others may charge a fee.

Step 2: Find a Lender and Discuss REO Financing

Once you’ve found a property you’re interested in, talk to a lender about your financing options. This is particularly important because of the timing of the REO home-buying process. Lenders are motivated to sell and want to get these homes off their books, so the more prepared you are with financing, the better.

Getting pre-approved by the lender that owns the REO property can help speed up the process. Pre-approval shows the lender that you’re most likely financially qualified, increasing the likelihood they’ll accept your offer.

Step 3: Find a Real Estate Buyer’s Agent Who Knows REO Homes

A buyer’s agent is a great partner for helping you find the best properties at the best possible prices. They'll use their expertise to guide you through every stage. Your agent should also be able to tell you if you need to hire anyone else, such as an attorney or an inspection service, depending on your state and situation.

Moreover, if you’re focused on buying a bank-owned property, look for a buyer’s agent who is knowledgeable about REO transactions. An expert can help you navigate lender negotiations, estimate repair costs, manage strict timelines and steer you through each step of the process.

Step 4: Refine Your List of Bank-Owned Properties

Once you’re working with a buyer’s agent, you can start narrowing down your list of REO properties. The following are some major factors to consider:

• The home’s listing price
• Repairs required
• Location (proximity to a school, workplace, or other desired area)
• Number of bedrooms and bathrooms
• Quality of the neighborhood and surrounding areas
• Community resources in the area, such as parks, gyms, places of worship, etc.
• Lender-specific contingencies or requirements

Once you’ve considered your must-haves, refine your list based on more nice-to-have features like a large yard, a finished basement or an in-ground pool. Then, share your favorite homes with your agent, who can set up tours for properties at the top of your list.

Step 5: Get an Appraisal on Your Ideal Property

Some REO homes go for a great price, but buying a bank-owned home is not an automatic bargain. An REO property may be discounted based on an undesirable location or severe damage, or it can be overpriced based on comparable sales in the area or the lender’s desire to recoup the money spent. Either way, consider getting an appraisal to know how the true value compares to the asking price.

An appraisal will help you get an objective estimated value, which you can compare to the bank’s asking price to see if the price is fair. During the appraisal, a licensed appraiser will take inventory of major systems (i.e., HVAC, plumbing) and the home’s structural integrity and check the prices of comparable homes in the area.

Note: An appraisal, which aims to estimate a home's true value, is different from a home inspection, which aims to take inventory of current and potential issues. While an appraisal will help you decide whether or not the asking price is fair, an inspection will help you understand the repairs and renovations needed. Both are critical for a bank-owned home.

Step 6: Make an Offer

Once you’ve found a property that’s right for you, it’s time to make an offer.

Your agent will help you decide what kind of offer is likely to be accepted, put your offer together, and submit it to the lender. Depending on the lender, you may need to submit special contract forms or paperwork. It’s also common to attach an earnest money deposit check to your offer. This check (commonly 1-2% of the purchase price) is a commitment to follow through with the sales process and is usually held in an escrow account until the purchase is finalized.

Make sure to consider the inspection when making your offer. You may opt to make the offer contingent on inspection, so you’re protected if the inspection uncovers significant (and potentially dangerous) issues. If necessary repairs are well-documented, you can use that documentation to make your case for a lower offer. Talk to your agent to understand your options when it comes to inspection contingencies.

Step 7: Have the Property Inspected

An inspection is essential when buying any home, but it’s especially critical for bank-owned properties.

While REO homes are typically sold “as is,” meaning the buyer is responsible for repairs, buyers are still able to inspect the property. However, the seller likely won’t cover repairs or reduce the price based on the inspection findings.

An inspection can uncover issues that may impact your decision, including:

• Structural damage
• Major repair needs
• Non-permitted renovations
• Damage caused by vacancy or neglect

An REO home may have been vacant for weeks or months, or neglected due to the homeowner’s financial trouble. Additionally, the previous owners may have removed items or damaged the property before vacating. It’s also possible that the property has gone through non-permitted renovations.

With that in mind, you should be 100% sure you know what needs to be fixed before finalizing the loan. A home inspection is the best way to take a thorough inventory of needed repairs. Factor these repair costs into your overall budget to better understand what the home will cost you (and whether it’s still a good deal after accounting for repair expenses).

In some cases, the lender may already have an inspection report available. If so, request a copy and review it carefully to decide whether it provides enough detail for your decision.

Step 8: Negotiate Details

Negotiating with a lender for a bank-owned home is different from negotiating with a homeowner.

On the plus side, dealing with a bank instead of a homeowner means you don’t have to worry about emotional attachments to the home influencing the seller’s decision.

Banks typically take longer to respond to an offer (or a question) than a homeowner because several individuals or companies must review the offer. When the lender does respond, they’ll expect you to react quickly to keep the process moving.

Banks are also more likely to present a counteroffer because they must demonstrate they tried to get the best possible price for the property. In addition, the lender may ask you to sign a purchase addendum (which you should thoroughly review with your real estate agent or lawyer). Your final offer may be contingent on corporate approval.

Step 9: Finalize Your Loan and Verify Title Status

Once you’ve submitted an offer, several things will happen simultaneously: the home inspection, negotiations with the bank and the loan application process. During this time, you’ll be filling out paperwork and sharing information with your lender to ensure your loan fits the offer you’ve submitted.

Now is also the time to verify the status of the title to ensure the property is free of liens or legal issues. The bank typically clears the title before selling a bank-owned home, but you can never assume this is the case.

Before closing, make sure to:

• Contact the lender to confirm whether the title has been cleared
• Ask whether the lender already has a title company handling the process
• Hire a title company yourself if you’re expected to complete the title search independently

If needed, hire a title company to run a full, insured title search before closing the deal.

Step 10: Closing

Once all the paperwork is complete, you’ve wired in your down payment, and your loan funds are in place, it’s time to close.

Closing on an REO property is similar to any other closing, with a few notable exceptions.

Strict timelines. Scheduling the closing date may be less flexible, as the lender or bank will want to finalize the sale as quickly as possible.

More paperwork. The REO home closing process often involves more documentation, including bank addendums with specific terms that often vary from standard agreements.

At the closing, you and the lender representative will sign the documents necessary to transfer the house into your name and finish your mortgage. After you’ve signed everything and the money goes to the right place, you’ll get the keys and a new title: homeowner.

Financing Bank-Owned Homes

Unlike foreclosure auction properties, REO homes may allow buyers to use traditional financing options, depending on the property’s condition and loan requirements. However, the process can still involve additional paperwork, lender review and longer approval timelines.

• Get pre-approved early. Pre-approval shows lenders you’re a serious buyer and can help strengthen your offer in competitive REO situations. Banks selling REO properties may move quickly once they receive a qualified offer with strong documentation. Cash offers may close faster, but a strong pre-approval can still make a financed offer competitive.
• Explore available loan options. Depending on the property and your qualifications, financing may include conventional, FHA or VA home loans.
• Understand how property condition affects financing. Deferred maintenance, safety concerns or missing systems may limit financing eligibility or require repairs before closing.
• Consider renovation financing if repairs are needed. Renovation loans may allow eligible buyers to roll repair costs into the mortgage instead of paying them fully out of pocket.

Tips for Buying an REO Property

Ready to pursue a bank-owned home? Position yourself for a successful REO property purchase with these tips.

• Perform due diligence. Avoid rushing into a purchase without a thorough inspection. Remember that bank-owned homes are sold as-is, so it’s essential to understand the property’s condition. Review the listing details and ask for a history of the home, including past maintenance and repairs. Conduct a title search to ensure no liens or legal issues will follow you after the sale.
• Read the fine print. Carefully review all documents, including any bank-required addendums, as they may include restrictions or special terms.
• Hire a knowledgeable real estate agent. A real estate agent experienced with bank-owned properties can guide you through the unique aspects of these transactions.
• Be realistic about costs. Many buyers overlook repair and closing costs, which can quickly add up. Get quotes for major repairs before committing to purchase and incorporate costs into your budget.
• Exercise patience. The process may take longer than expected, so maintain open communication with all parties involved.

Frequently Asked Questions About Bank-Owned Homes

What does real estate owned mean?

Real estate owned (REO) refers to a property that a lender or bank has taken ownership of after an unsuccessful foreclosure auction. These homes are sometimes called bank-owned properties and are often listed for sale through a real estate agent.

Is an REO foreclosure the same as a foreclosure?

Not exactly. A foreclosure is the legal process that happens when a homeowner falls behind on mortgage payments, while an REO property is a home the lender owns after the foreclosure process is complete and the property does not sell at auction.

How do you buy bank-owned homes?

You can buy bank-owned homes through a real estate agent, online listings or lender-owned property marketplaces. Buyers typically tour the property, make an offer and complete financing just like a traditional home purchase, although some REO homes may be sold as-is.

Is an REO Home the Right Fit for You?

Buying a foreclosed home as an REO property can be an excellent opportunity for homebuyers or investors to find a good deal — but only if you’re willing to be patient and thorough. Dealing with a lender rather than an individual seller may mean slower response times and a more complex negotiation process. Still, it can lead to a potentially great investment if you’re properly prepared. Contact a Pennymac Loan Expert to discuss your options today.