Foreclosures for Sale: The Difference Between an REO and a Regular Foreclosure
The foreclosure crisis has caused many foreclosed homes to flood the market. What this means is a great opportunity for real estate investors looking to buy foreclosed homes (REO properties) cheap. Many of these are new investors who don’t understand the different types of properties available for sale.
Hence, a common question is, “What’s the difference between a regular foreclosure and an REO foreclosure?” Following is the answer.
Home Foreclosure: What Does REO Mean?
It means real estate-owned. It’s a nice way of saying the bank owns the property; they’ve “repossessed it so to speak”. So when you see a listing for an REO property, it has already been foreclosed on and has gone back to the bank.
A “regular” foreclosure, on the other hand, is a process whereby a property is in the process of being sold. It can be bought at auction (those selloffs on the county steps) by an interested party, ie, an investor or a new homeowner.
A Pro and Con of Buying REOs
Pro: They can be bought cheap. The rationale behind this is simple – banks are a business and they lose money when they have foreclosed properties on the books. Banks/lenders lose on two fronts with REOs: (i) money going out; and (ii) no money coming in.
Money Going Out: There are carrying costs with foreclosed properties that the banks have to pay. After all homeowners insurance still has to get paid; HOA dues still have to get paid; and maintenance has to take place.
No Money Coming In: Nobody’s paying the mortgage, so the bank is not making any money.
Con: Oftentimes, banks don’t do repairs on REO listings. You’re often buying them “as is”. Remember, banks are a for-profit business. They’ve paid the carrying costs for the property since the previous owner stopped paying the mortgage.
As you usually cannot get disclosures as to the history or condition of the property, you could be buying a cash-sucking cow when you invest in REOs. There could be all kinds of problems – expensive ones like wiring, roofing, contractor liens, etc.
If you’re thinking, “I’ll get an inspection done beforehand, “ think again. You might not have the chance, depending on when the property goes up for auction and how the auction is carried out in your municipality.
In spite of all of this, purchasing an REO property is a great way to buy foreclosures cheap.
P.S.: Business Opportunity: Learn How to Start a Foreclosure Cleanup Business. Read how one foreclosure cleaning biz owner makes up to $40,000/wk .
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