Lender-owned (REO):

REO is an acronym for real estate owned and is industry jargon for foreclosure property repossessed by banks or lenders. If a lender or bank is the highest bidder at a foreclosure auction — or if no third party bids at the auction — the property reverts back to the lender and becomes an REO. REOs are owned by banks. Lenders go to great lengths to sell REOs. For banks, however, bank-owned homes are a liability.

When the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair; however, the potential bargain for these REO homes is typically less than a pre-foreclosure or auction property. Lender/Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.

Tips for Buying Lender/Bank-Owned REO Properties

While buyers have found few large discounts among bank-owned foreclosures, opportunities for bargain hunters are likely to improve if mortgage defaults continue to increase. Across the country, a staggering number of homeowners are entering the foreclosure process and many are losing their properties to the bank or lender. As the inventory of bank-owned properties grows, lenders nationwide will be more open to negotiate price and other terms. And prospective homebuyers and investors are looking to cash in on rising tide of foreclosed homes.

Caught in the turmoil of the sub-prime mortgage meltdown, a growing number of banks nationwide are scrambling to dispose of their rising inventories of foreclosed homes. Investors and homebuyers who specialize in the bank-owned properties, known as real-estate-owned, or REOs, are having a field day.

Once a home goes up for auction, a bank typically will send a representative to bid as much as the bank is owed. The lender generally will let it go if they are outbid — since they've then recouped their investment. But if the bank is the highest bidder, the property becomes an REO home.

While there are bargains to be found, REO properties aren't selling far below market value yet. One reason is that bank-owned sales transactions can be more complicated, in part because the sale terms must be approved by the lender or the lender's attorneys. Another reason it is difficult dealing with bank-owned properties is that some lenders are in offices far away from where the loss-mitigation department is struggling to process the listings. And with layoffs occurring within the industry, banks are even more understaffed than before.

Here are a few tips for foreclosure investors and homebuyers seeking lender-owned properties:

• Real estate investing, like any investment strategy, is part of an overall financial plan. Before jumping into buying bank-owned real estate, understand the real estate laws, tax ramifications and other financial issues.
   
• Consult with a tax or financial adviser who can help you assess your financial situation. Get your financial house in order first — that way, you know how much house you can buy.
   
• Don't think that foreclosure investing is easy. For every successful real estate investor, there are countless others who have failed. Make sure you spend time studying the market.
   
• Seek professional help. Hire a real estate agent with foreclosure experience. Look for a mentor who can walk you through your first deal.

CHECKLIST: For Buying a Lender/Bank-Owned REO Property

Are you a real estate investor or homebuyer looking to purchase a lender-owned property? With the number of lender-owned foreclosures rising nationwide, there has never been a better time to purchase real estate owned by Lender/Banks.

Once a property is repossessed by a bank or lender, the property will probably be listed for sale through a real estate agent. Good buys are available, but they require research, preparation, patience and persistence. Buying a lender-owned home in foreclosure isn't easy, and it's hardly without risk. Before you consider plunging into the foreclosure market, be sure to do some in-depth research.

Here is a list of things you can do to successfully purchase a lender-owned REO:
 

1. Inspect Property.

Most foreclosure properties are referred to by investors as "distressed" properties. Lender-owned foreclosure homes are usually sold "as is," which means that the 15 percent discount you just saved on the purchase price can easily be eaten up by unforeseen expenses — such as repairs not immediately apparent in an exterior inspection. Many owners of homes that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender frequently damage the property. So be prepared to do renovations and repairs. Hire a licensed home inspector to give you a written estimate of the cost to repair the property. Budget that number into your purchase price. Repair costs can be used later in your negotiation with the lender to reduce the asking price.
 

2. Title Search.

Once a home has been located, your title company will run a full, insured title search before closing the deal. Liens on the property can drive up the purchase price. Common liens typically are placed on a property for unpaid loans borrowed against the property, taxes or unpaid contractors (mechanics liens). These liens remain intact until the money is paid, which means that you may have to pay off the liens on the foreclosed property you are buying — even though you're not the one who didn't pay the property taxes. Lenders should clear the title before selling but never assume this is the case — just as you would if you were buying a property from anyone else. For extra assurance purchase an owner's policy from your title company in the event a claim appears after the closing.
 

3. Negotiate

Although most lenders want to unload their foreclosed properties, they won't necessarily do so cheaply. So you aren't guaranteed a fabulous price. But remember you're dealing with an eager seller. Even though the lender's REO manager or their listing agent might suggest that the list price is "firm," never be afraid to negotiate price — especially if the foreclosed lender-owned home needs repairs. When submitting a low offer, you need to substantiate the reduced price in writing and document your case. You should furnish photographs and cost estimates for repairs to support your offer amount.
 

4. Financing.

With good credit, many lenders will loan the full price of the foreclosure or more. If the home is to be used as a rental, many lenders will require only a 10 percent down payment. Foreclosure investors with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required.