Buying a house right now is a nightmare. Just a few years ago, lenders were giving out 3% mortgages left and right, but today, interest rates are hovering at around 7%. Meanwhile, home prices are soaring, with the median price nationwide currently a bit over $430,000—which means you need a six-figure income to comfortably afford a house in nearly half the country.
If you want to buy a house but the prices in your area are turning your hair white, it might be worth looking into post-foreclosure properties, otherwise known as real estate owned (REO) properties.
Why buying a real estate owned (REO) property can save you money
A real estate-owned (REO) property is one that a bank or other lender has foreclosed on, and that failed to sell at auction or as a short sale. As a result, the bank now owns the property and most probably fervently wishes it didn’t. Banks aren’t in the real estate or property maintenance business, and keeping properties on their books increases their financial risk.
That often makes the bank into a particularly motivated seller, which is good news for you: REO homes are often listed at very competitive prices—what’s known as the REO discount, which can be as much as 41% off the market value. You’re not guaranteed to save that much, and it’s not like you’re going to buy a turnkey million-dollar house for a bargain, but you can definitely save some money by going this route.
One major caveat of considering REO properties is that they are typically sold as-is, so if the defaulting owner let the maintenance and repairs slide towards the end of their ownership, you might have a lot of expensive repairs to deal with. On the other hand, the bank will usually have cleared away any liens or debts (like unpaid property taxes) because they want to avoid obstacles that will prevent a quick sale. All this means that if you’re not afraid of buying an as-is house that might need significant repairs, buying an REO property from a bank can save you bank.
How to find REO listings
Finding REO properties takes a little bit of research, because there’s no centralized listing service you can refer to. But there are some common ways to discover them:
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Bank websites. Banks often have entire REO departments, and maintain websites listing the REO properties they’re trying to sell. Bank of America, for example, lists their properties here.
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The Multiple Listing Service (MLS). The MLS is used by real estate professionals, and offers listings of REO and foreclosed properties as well. Some banks list their REO properties directly on the MLS.
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Foreclosure databases. Every REO home starts off as a foreclosure, so tracking foreclosures that fail to sell can let you be first in line for a plum REO listing. You can track foreclosures using a foreclosure database like RealtyTrac, Auction.com, or Foreclosures.com. Since real estate databases like Zillow or Trulia also list foreclosed properties you can do the same thing—track a property to see if it fails to sell.
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Federal databases. The Federal government writes a lot of home loans, and gets stuck with REO properties like any other lender. When they do, they list them at HomePath (Fannie Mae properties) or HomeSteps (Freddie Mac), or HUD Homestore (Federal Housing Administration-owned homes).
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An experienced realtor. If you decide to target REO homes, it’s a good idea to identify a real estate professional in your area who has REO experience and has been granted a short sales and foreclosure (SFR) certification by the National Association of Realtors (NAR). The NAR maintains a searchable database of these agents, which can help you find someone in your area. You should also get pre-approved for financing. Banks are eager to get REO houses off their books, so they like to know you’re ready to pull the trigger.
