What are REO Homes?

Malcolm Tatum
Malcolm Tatum

REO homes are real estate owned homes that are often offered for purchase at a highly competitive rate. The idea of an REO home is often associated with bank foreclosures that are then offered to buyers in the hope of recouping at least most of the investment made by the bank in the property. These bank owned REOs usually involve property where a default on an outstanding mortgage exists. Depending on the circumstances, an investor may be able to acquire the property well below the current market price.

Banks can mitigate their losses by selling REO homes when a client defaults on a mortgage.
Banks can mitigate their losses by selling REO homes when a client defaults on a mortgage.

Real estate homes that are put up for sale after a bank foreclosure are sometimes sold at an auction. When this is the case, the bank that currently holds the title to the property often is mainly interested in recouping any remaining investment that was made in the original mortgage. Any costs associated with the foreclosure are also often included in the calculation for the starting bid at the auction. The date and time for the auction is announced to the general public, and any investor who meets the credit qualifications may be allowed to bid on the REO homes listed on the roster of items to auction.

Real estate auctions may be advertised in local newspapers.
Real estate auctions may be advertised in local newspapers.

Purchasing REO homes is one method of obtaining a first home at an excellent price. For candidates with excellent credit or the liquid capital to complete the purchase with no delays, the savings can be significant. People who wish to create a network of rental properties often acquire REO homes in order to expand the rental business and offer more homes in desirable neighborhoods.

REO homes do not have to be sold by the bank at an auction. Many financial institutions maintain a listing of foreclosed properties and offer them for direct sale to qualified candidates. For this reason, it is often a good idea for anyone wishing to purchase REO homes to talk with a bank about properties currently held in foreclosure. There are also businesses that monitor foreclosure activity and provide information to land speculators and others who are interested in increasing their real estate holdings. These services are often provided in exchange for a fixed fee or a percentage of the final purchase price.

Since REO homes are bank foreclosed properties, it is often in the best interests of the banks to provide terms and conditions that will attract qualified buyers. This often includes smaller down payments as well as a break on the interest rates for any financing needed by the buyer.

REO homes are often sold after a bank foreclosure.
REO homes are often sold after a bank foreclosure.
Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments


@Istria- A HUD home is a residence that was bought by an FHA insured loan and has been foreclosed on. The US Department of Housing and Development then becomes the owner of the property, selling it to the owner-resident, public, real estate broker, state and local government, or private organization. HUD homes can be bought at a significant savings, but they do share the same risks as any other foreclosure home.

HUD homes are not warranted against repairs and damage, so a home inspection is still necessary. Interested homebuyers may find particularly good deals when purchasing HUD homes because they often have programs for neighborhood revitalization and good neighbor initiatives that can reduce the price of the home much further. The government is also not trying to make a corporate profit on the HUD home, so they are often cheaper than bank owned homes.

In your case, HUD offers a good neighbor incentive on some of their homes specifically for teachers, fire fighters, and police officers. Qualifying homebuyers receive a 50% discount on the cost of the home for homes included in the program. To buy a HUD home, you will need a broker though, and the owners/tenants have first dibs on purchasing the property.


What exactly is a REO HUD Home? I am interested in buying a HUD home because I have heard there are good HUD financing opportunities for teachers, but I do not know how to go about the process.

Do I need a realtor to bid on a HUD home? What is the good neighbor next door program, and how does it work? Do I need to finance a HUD home with a government-backed loan, or can I pay cash or find private financing?


@Framemaker- REO properties can be both good and bad investments. GiraffeEars makes some good points about the risks involved in purchasing an REO property, but there are also the benefits that author did not mention in the article. If you are looking to buy in this climate, you may find a great home in a market that has bottomed out, which costs less than its intrinsic value.

Additionally, banks have a glut of properties on their balance sheets that they are losing money on every day. They are trying to clear these properties off their books, even if it means taking a loss. Just be weary of the financing details. It still makes sense to shop for financing so that they do not make up the difference in the financing numbers.

I am more of an opportunist, and I would prefer to buy an REO during a recession. The bubble has peaked, the homes for sale at their lowest values, and there are fewer bids per property. With proper research, you can land a great deal in a depressed market easier than a sellers’ market.


@Framemaker- There are all kinds of risks involved in purchasing bank owned properties, and they can translate to paying more than fair market value for a property. It is somewhat of a misconception that a REO is going to be sold at a steep discount. Banks are not in the business of giving things away.

Most banks will sell an REO "as is", which means that the home could need numerous expensive repairs to make it livable. In most cases, banks will also try to recover their investment and then some. You could end up paying more than the value of the home if you factor in the cost of repairs, the number of offers on the property, and the price the bank is demanding.

Finally, bank owned properties must go through a lengthy approval process before the sale is completed. If one person in the long chain of command denies the sale, the process must be started over again. In some cases, a buyer may purchase an REO well before the market bottoms out, losing more value on the property, especially if the bank backed the loan when prices were artificially high. I would advise talking to a realtor before making a decision to purchase an REO.


What are the downsides to buying an REO or foreclosed home? It seems like there has to be some risk involved in purchasing an REO. There are so many homes on the market, especially foreclosures. I would be interested in buying an REO, but I want to learn more.

What should I look for in an REO? Can I trust the banks to work in my best interest when purchasing an REO or are they only concerned about their bottom line? I am a first time homebuyer with excellent credit and some savings. Would an REO be a good investment?

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