Problems With Buying REO Properties

• REO stands for real estate owned, referring to property that banks own due to foreclosure processes. REO properties are treated like other properties on the market, but with some differences. A foreclosed home is sold at auction to the highest bidder: if no bidder reaches the lowest price that the bank will consider, then the property passes officially into the hands of the bank. Now that the bank owns the house, it makes changes of its own and sells it on the market.

Additional Fees

• When banks put a house on the market, they may decide to pay certain fees associated with the house. Most real estate agreements require the bank to pay property taxes the year the house is sold, but other fees are less dependable. The bank may pay homeowner's association dues for the year, for instance. Buyers should realize that every bank approaches REO houses differently and may include different fees.

Sight Unseen

• Buying a house sight unseen is always very risky, but the risk is even greater for REO properties. If a property has actually passed into bank ownership, this means that the previous owner may have been evicted. Evictions are not good for a home: at best, owners may leave trash and dirt behind that the bank may not clean up. At worst, the owners will damage the property out of spite.

Bank Actions

• Banks do not have an emotional investment in the home. This makes it very easy for them to play bidding games with agents and buyers to try to get the highest offer possible. They may make very high counteroffers, wait for cash offers instead of higher loan-based offers, and play bidders against each other. This makes the bank more money, but can also be very aggravating for buyers who are interested in the house.

Lien Problems

• Most people think that REO homes have no problems with liens, since they come with title insurance and title insurance covers any past lien problems. This is not strictly true: title insurance does cover many issues, but not all. If the previous owner built an illegal structure, for instance, the title insurance may not cover the issues created if someone buys an REO and then tries to sell it with the illegal structure on it.