REO vs. Foreclosure: REO Benefits and Limitations

REO vs. Foreclosure: REO Benefits and Limitations

REO vs. Foreclosure: REO Benefits and Limitations

The abbreviation REO (real estate owned) is commonly used to refer to a property that has been foreclosed and taken back by the mortgage lender. Contrary to popular belief, the REO and foreclosure don't represent the same process. In fact, an REO is the byproduct of a foreclosure which has failed, and therefore the mortgage lender takes back the property to sell on their own. In regards to which is "better" to purchase, the answer is relative. Choosing between pursuing an REO property versus a foreclosure property depends greatly on one's own preference, as both have their respective benefits.

REO properties may have a negative stigma attached to them due the fact that they failed foreclosure. This fact shouldn't deter buyers, however. It simply shows that there was a problem with the property owner, not the property itself. There is usually nothing inherently wrong with an REO foreclosure property beyond the fact that its owner couldn't make the proper payments. REO properties are often recommended to new homebuyers, and this is not without good reason. Purchasing an REO is generally safe and there's no real risk for the buyer, meanwhile statistics show that REO purchases have become the most popular choice for first time homebuyers. Banks want to sell these homes as quickly as possible, leading to great deals for the potential buyer.

Generally, pursuing an REO seems like a great deal all around. Cheap prices, good rates, clean sheets, etc. The potential downside comes in the fact that actually acquiring an REO is easier said than done. There's often multiple bidders attempting to get a good deal, and competition can be fierce. One has to figure out how to make their offer stand out over others. While the bidding and pricing process of an REO foreclosure can be a headache, it's usually a small price to pay in relation to a potentially great deal.

The process of a foreclosure sale is different from that of an REO. Foreclosures start off with a minimum bid by the buyer. To be able to bid, the buyer must have a cashier's check with the full amount of the bid. If the bid wins, the property is given in its current condition ("as is"). The condition of the property may vary; meanwhile there could be other financial attachments to the property at the hands of former tenants. Such problems don't present themselves in an REO sale. Foreclosures are often sought because the prices can be very easily financed as lenders want to get rid of the property immediately. With that in mind, however, what the property owes to the bank is basically always more than what the property is worth; a foreclosure purchase often favors investors over those looking to buy a home. With all of this in mind, both types of properties have their ups and downs and only the buyer can decide what fits best in their financial plans.

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