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What are bank-owned properties?

Bankrate logo Bankrate 5/5/2021 David McMillin
a sign in front of a building: A closeup of a bank-owned open house sign © DIPA/Getty Images A closeup of a bank-owned open house sign

Whether you're looking for a home to live in or 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.

Bank-owned properties can be a fit for a specific type of homebuyer or investor, but they can be difficult to find in today's market. Here are the basics to know.

What are bank-owned properties?

A home becomes a bank-owned property after the homeowner defaults on their mortgage and the bank forecloses. Before becoming bank-owned, the property was likely available 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.

Bank-owned property vs. REO

The acronym REO stands for real estate owned, and it's the same as bank-owned. If no one opts to buy a foreclosure home at auction, the bank or mortgage lender or servicer takes ownership of the property, and can refer to it as either bank-owned or real estate owned (REO).

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 a bit of 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," explains Sam Olson, CRS, team lead of Nevada-based The Olson Group with RE/MAX Gold.

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," Olson notes. 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.


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

Pros and cons of bank-owned properties

Pros

  • Lower price: The most obvious upside to a bank-owned or REO property is the potential to get the home at a discount. With home prices still rising, any savings in today's market is good news.
  • 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

  • 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 price. That is not a standard process in a bank-owned transaction. "Most banks will allow inspections," Olson says, "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, the price needs to be approved by multiple parties, so settling on a price may take longer than it would if you were dealing with one seller.
  • Big repair costs: After you settle on a price, get ready for more expenses once you start addressing issues in the home. Olson notes that renovations and repairs are carrying especially high price tags now. "The costs of lumber are up 188 percent from the third quarter of 2020 to the first quarter of 2021," Olson says, "so even if a savvy purchaser will do rehab work themselves - and there's always rehab work in an REO - the hard costs of that rehab are triple what they were just last summer."

How to find bank-owned properties

Be forewarned: You're going to need to do some serious searching for a bank-owned property these days due to pandemic protections that have all but halted foreclosure activity. The number of available bank-owned properties declined in March by more than 82 percent compared with the previous year, according to data from RealtyTrac.

"Due to federal, state and local foreclosure prevention interventions, the natural ebb and flow of the REO market has all but ceased," Olson says, adding that "the flood of foreclosures long feared at the end of the COVID-19 pandemic may well turn out to be a tempest in a teapot instead of the superstorm feared by the real estate industry - and hoped for by buyers 'holding out until the next crash.'"

If you're looking for a bank-owned property now, you can search RealtyTrac's listings, or you may be able to compare properties on a bank's website. Bank of America, for example, maintains an online hub of REO listings. Wells Fargo also has a directory of bank-owned properties.

Regardless of how you initially search for these types of properties, it can be invaluable to enlist some assistance in actually making it yours, especially if you're new to a bank-owned transaction.

"For whatever purpose a buyer is considering REO - owner occupancy, rental or flip - a Realtor with experience in the distressed property submarket and bank negotiations is essential," Olson says.

Next steps

The process of buying or investing in a bank-owned property is nuanced and can be challenging to navigate. These resources can help:

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