In the world of real estate there are many, many types of properties that you can buy. The majority of the time people hire a real estate agent to help them buy a property that is listed on the MLS (multiple listing service) of the area that they are looking for. Whilst most people go through this route, other, perhaps more astute, or bargain hunting people, look at houses that are either in foreclosure of REO (Real estate owned) by a bank or Loan Company.

A common misconception that people outside of the real estate industry make believes that foreclosure and an REO purchase is the same thing. Although they are similar, they are in fact different; more precisely they are corollaries of each other, with an REO being a direct result of a failed foreclosure sale. To understand the difference between the two and how they vary from each other it is best to define what each is, and their respective merits.

The term Real Estate Owned propriety is sometimes used ambiguously, but has a specific meaning in the real estate industry; a property that has been fore-closured on by a bank or Loan company and has reverted back to the ownership of the lender. So as already explained above an REO is the result of property that has been foreclosed on, and is produced only as a result of a failed foreclosure sale.

Knowing that an REO is the result of a foreclosure leads us to wonder what is foreclosure, what are the benefits of buying a house that has been foreclosed on and what are the reasons why they fail to find a buyer.

Under the terms of foreclosure a bank or Loan Company reposes the property due to the tenants inability to continue with payments on their loan; that they used to purchase the property the first instance.

Once the foreclosure notice has been issued and foreclosure has started the bank or Loan Company legally has the right to sell the property; regardless of whether the tenants haven’t moved out yet.

In order to purchase a property in a foreclosure sale there are a number of items that the bidder needs to successfully complete. Firstly the buyer has to submit a minimum bid that includes the following:

Regardless of the above, in order to bid at foreclosure the buyer must also have a cashier’s check in hand for the full amount of the bid. If the buyers is successful then they will be offered the house in its ‘as is’ condition; complete with tenants who need evicting and liens secured on the property.

Because of all the difficulties and lack of concrete benefits in buying at foreclosure, most people who want to buy a foreclosed property will go through the REO route.

The REO method of purchase offers much more benefits, incentives and less stress than the foreclosure method.

When a bank or Loan company takes back a property they then have the property listed as a sellable asset on their books. The role of the bank is to maximize the wealth of its shareholders. If the foreclosed property can be sold to release cash to invest, then this is the main motive for the bank or Loan Company; sell the property and invest the cash.

In most situations a bank will be looking for a quick sale, and as such will offer many incentives and benefits to prospective buyers:

Although the benefits of an REO seem to out weigh those of a foreclosure purchase you should not take them at just face value; you should always look into exactly what you are getting and what you are liable for, should you choose to purchaser a property.

In a REO sale the bank will evict the tenants (or you could leave them there and let them pay rent), remove any liens etc and do the basics. Most of the time however the bank will not make any repairs to the house and want to sell it to you in what is called ‘as-is’ condition: the condition the house was in when it reposed it. IF this is the case you should seek the services of a home inspector, to find out the sate of the property and to help you decide whether you wish to continue the transaction.

Although a bank owned property might look like a good deal on the outside, it is necessary that you do your background research on the property before you commit to any contracts. Your first priority should be to find out what the house is worth in today’s current market; having a comparative market analysis carried out will help you with this aspect of the purchase.

The reality that a bank or loan company is trying to sell its REO property does not necessarily mean that they are going to sell the property at a bargain price; such would be going against their role: to maximize shareholder worth.

If after you have had the property checked you still wish to continue with the purchase you will most likely make the bank or Loan Company an initial offer. Generally the bank’s response will be to counter the offer and ask for a higher price; a standard trick for the industry.

The emphasis will now be on you to decide on what you want to do. If you decide that the price that the bank or Loan Company is asking for does not reflect the market value of the property then you can stop and walk away. If you are happy you can counter their offer and submit a new bid.

It is most likely that the bank or Loan Company will have a whole department to handle their REO transaction, and as such it may take a while to get back to you, as around 3 or 4 people may have to review your offer.

If the bank approves your offer, then great for you! If they reject the offer however you should look at whether you are happy paying more or whether you feel that the price they are asking is either above market value or unacceptable to you.

If you continue with the transaction the bank or loan company will draw up a contract. It is necessary for you to take a good look at the contract and maybe have your attorney go over it with you, as once you sign it you are liable for what it states.

If you have not done so by the time you accept the banks offer you should have the house inspected by a professional. If you are waiting for an inspection, and already have the contract drawn up you should have an inspection contingency written into the agreement, so that you can pull out of any deal if the result of an inspection produce surprises or faults you are not comfortable with. You should always remember that the bank or Loan Company will always want to sell the property ‘as-is’.

You should if possible always consult a realtor or real estate agent before committing to a contract, or indeed making your offer to the bank or Loan Company. If you do have a realtor working for you, you should as him or her to find out from the listing agent the following details about the property, before you come to you conclusion on the offer you will make: