Bank-owned properties: What are they and where can I find them?

Whether you’re looking for a home to live in or use as an investment, you may come across a bank-owned property in your search. These properties can be listed for sale just like any other on-the-market home, but they aren’t owned by a homeowner — instead, they’re owned by a bank. Here are the basics to know, including how to find bank-owned properties.

What are bank-owned properties?

A home becomes a bank-owned property after the homeowner defaults on their mortgage and the bank forecloses. Bank-owned properties may also be referred to as real estate owned or REO homes, REO properties or simply REO. You might see a property listed with details like REO foreclosure, meaning a financial institution — not an individual homeowner — is selling the property.

Before becoming bank-owned, the property was likely available to buy as a foreclosure sale, but didn’t sell during that process. So, ownership officially transferred to the bank — the final step in reclaiming the property from the homeowner who didn’t keep up with their mortgage payments.

If no one opts to buy a foreclosure home at auction, the bank or mortgage lender or servicer takes ownership of the property.

Who buys bank-owned properties?

Anyone can buy a bank-owned property, but the buyer most likely to purchase one is someone hunting for a deal. Real estate investors especially view bank-owned properties as an opportunity to put some money into the home and get more out via renting it to tenants or selling it to new owners.

“On rare occasions, there’s a tidy equity position to be realized by purchasing and rehabilitating a bank-owned property, either for occupancy, as an investment or a short-term fix-and-flip,” says Sam Olson, CRS, team lead of The Olson Group with RE/MAX Gold, based out of Nevada.

The upfront cost of an REO property may translate to a worthwhile ROI (return on investment), but not always. For example, the average purchase price of an REO in Reno was 90 percent of the value when sold traditionally — a “tight margin,” says Olson.

Buyers often have to spend more money after the sale, which can eat into profit. That’s because bank-owned or REO properties typically require work. After all, if the previous owner couldn’t keep up with mortgage payments, they likely couldn’t keep up with maintenance, either.

“For the casual or first-time purchaser, an REO purchase has very high risks for a smaller-than-imagined reward,” says Olson.

How to find bank-owned properties

You can find REO properties by searching RealtyTrac’s listings, or you may be able to compare properties on a bank’s website. For example, Bank of America and Wells Fargo each have an online hub of REO listings.

Online home auction sites — like Auction.com and HUDHomesUSA — allow you to filter by REO foreclosure, meaning you can find bank-owned properties relatively easily.

You can also find institution-owned properties on government websites like the Department of the Treasury’s real property auction webpage or the Federal Deposit Insurance Corporation’s list of properties that this agency has taken over from failed banks.

If you really want to know how to find bank-owned properties in your area, the right real estate agent can help, too. Look for an agent or mortgage broker who specializes in REO homes to help you identify properties and handle the bank negotiations.

Pros and cons of buying bank-owned properties

There are advantages and drawbacks to consider before deciding to buy a REO property, including:

Pros of bank-owned properties

• Lower price: The most obvious upside to a bank-owned or REO property is the potential to get the home at a discount.
• Long-term earning potential: If you manage to find an especially good deal and then get the property in pristine condition, you may be able to reap the benefits of selling it to a new buyer or renting it out on a regular basis.

Cons of bank-owned properties

• No chance of concessions: In a traditional home sale, a seller might give a buyer a credit, or concession, for something that needs to be fixed. For example, if a home inspection reveals that the furnace needs replacing, the seller might offer a small discount on the price. That is not a standard process in a bank-owned transaction. “Most banks will allow inspections,” says Olson, “but will not provide any assistance in repairs, which can add up quickly.”
• Longer timeline: If you submit an offer for a bank-owned property, multiple parties need to approve the price, so settling on a number may take longer than it would if you were dealing with one seller.
• Repair costs: After you settle on a price, get ready for more expenses once you start addressing issues in the home. You may have to do extensive renovations and repairs.