What’s the difference between foreclosure homes and Real Estate Owned (REO) homes?

Simply put, a home goes into foreclosure when the home owner can’t pay the mortgage lender back for the home loan. When this happens, the lender attempts to sell the home in a foreclosure auction.

During the auction, the minimum bid must include the amount of the outstanding loan, the accrued interest, attorney fees, and any other costs associated with the foreclosure sale. The lender sells the foreclosed home “as is,” which means that someone could still be living in the home, and the buyer would be responsible for making sure they evacuate the property. There could also be third-party liens for which the new buyer would assume responsibility.

A benefit to buying a foreclosure home is that the lenders will usually offer easy financing, and if the home is in very poor condition, they may accept a very low bid price just to get the property off their hands. Foreclosure sales are of best interest to investors, because they often come with existing tenants (the previous owners who defaulted on the loan) who usually wish to remain in the home. This way, an investor can purchase the home and be guaranteed to have renters right away.

Because the amount owed to the lender is usually more than the value of the home, properties rarely sell during a foreclosure auction. This is where Real Estate Owned (REO) home sales come into play. When a home doesn’t sell at a foreclosure auction, the mortgage lender takes back the home, making it an REO property.

It’s important to keep in mind that mortgage lenders don’t want to own properties for long, as they represent money that could be used for stock purchases or other investments. Vacant homes aren’t bringing in any money for the lenders, so it’s in their best interest to sell these properties as quickly as possible. Lenders also don’t want to incur the costs associated with maintaining the homes themselves.

So how do lenders sell these REO homes quickly after they weren’t able to sell them at a foreclosure auction? They do so by offering major advantages to buyers that weren’t available as part of the foreclosure sale. Some of which are:

• Buyers can get REO homes at below market value prices and with an unusually low down payment.
• Lenders will pay for back taxes and liens owed on the home.
• Lenders will take care of the eviction of former homeowners who may still be living in the home, so the buyer doesn’t have to hire someone to do that for them.
• Buyers have immediate access to the home for inspections and appraisals, making the buying process quicker.
• It’s easier to negotiate a better price for repair costs, closing costs, etc. with an REO home purchase.
• When a home is repossessed by the mortgage lender, the title is clear. This way, when a new buyer purchases an REO home, there’s no question about who owns the property.

So, if you’re an investor looking for a rental property, a foreclosure home might be a great option for you. However, for most people, an REO home purchase is the more convenient and financially beneficial choice. Know more on Home foreclosure listings.