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

Learn why bank-owned properties are worth considering for buyers ready to navigate the process.

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 an REO Home?

REO, which stands for Real Estate Owned, is a term applied to foreclosed properties whose ownership has been transferred to the bank or lender.

Before we get into the process of buying an REO home, let’s take a look at what foreclosure means.

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.

The Differences: Buying a Foreclosed Home Through Short Sale, Auction, or as an REO Property

A foreclosed home does not automatically become an REO property; In fact, to reach REO status, a property may first go through pre-foreclosure, where the homeowner attempts to sell it through a short sale. If that fails, it moves to a foreclosure auction, where it’s sold to the highest bidder. If the property doesn’t sell at auction, only then does it become Real Estate Owned (REO) and officially under the lender’s ownership. While REO homes are often referred to as foreclosures, they’re technically post-foreclosure properties since they’ve already gone through the foreclosure process.

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 REO Homes

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

Pros

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).

Cons

1. Take it or leave it. Bank-owned homes are sold “as is.” This means you purchase the home in its current state, as it stands, without repairs or improvements.
2. Potential for significant and expensive repairs. 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 initial apparent savings to know if it’s still beneficial for you to buy.
3. Competitive market. Bank-owned properties often attract investors and cash buyers, creating a competitive environment.
4. Price variability. 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.
5. Longer timeline. Buying a foreclosed, bank-owned property can take longer than a typical real estate transaction. Be prepared for a potentially lengthy negotiation process and multiple levels of approval.

10 Steps to Buying REO Properties

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 are 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 of 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 to have while you navigate the home-buying process. Your agent helps make sure you’re finding the best properties at the best possible prices, and 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 Lender-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
• Significant repairs needed (and the subsequent impact on price)
• Location (proximity to a school, workplace, or other desired area)
• Number of bedrooms and bathrooms
• Quality of 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 true home value, is different from a home inspection, which strives 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 all repairs, an inspection can uncover potential issues like structural damage or major repairs that may impact your decision. Buying a home as is doesn’t prevent you from inspecting the property — it simply means the seller won’t cover repairs or adjust the price based on the inspection results. This makes understanding the property’s condition before purchase even more imperative.

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 what repairs need to be made. 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 conduct an inspection when the home becomes bank-owned. If so, make sure you get a copy of the inspection report and review it thoroughly to decide if it is comprehensive enough to help you make 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.

Working with a lender also means jumping through more corporate hoops. 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. Contact the lender to see if the title has been cleared. If not, the lender may have a title company to perform these services. If you’re expected to do so yourself, 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. You may experience less flexibility with scheduling the closing date given the urgency the lender or bank that owns the property will be acting on to get the property sold as soon as possible.

More paperwork. The REO home closing process often involves more documentation, such as addendums from the bank outlining specific terms and conditions, which may differ from standard purchase 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.

Tips for a Successful Bank-Owned Home Purchase

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.

Get pre-approved. Having pre-approval in hand signals to the lender that you’re a serious buyer and speeds up the process. It can help you act quickly in a competitive market.

Read the fine print. Carefully review all documents, including any bank-required addendums, as they may include restrictions or special terms.

Get a home inspection. Even if the bank won’t make repairs, a professional inspection can help you understand what you’re walking into and estimate repair costs.

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 home-buying budget.

Exercise patience. The process may take longer than expected, so maintain open communication with all parties involved.

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.