What Is Bank-Owned Property?

Bank-owned property, also known as real estate owned (REO) property, refers to properties that were not sold during a foreclosure sale and are therefore added to the inventory of the bank that conducted the foreclosure.

Bank-owned property is real estate that is owned by a bank as opposed to a homeowner.

Bank-owned property is real estate that is owned by a bank as opposed to a homeowner. If the original homeowner defaults on the mortgage and indeed the home goes into foreclosure, the bank may acquire the property.

Because bank-owned properties are frequently sold at discounts, they can be attractive options for homebuyers and real estate investors. When purchasing a bank-owned home as a primary residence or investment property, there are, however, trade-offs that may be necessary.

Let's learn more about bank-owned properties and their advantages and disadvantages.

Definition and Example of Bank-Owned Property

A property that has gone through foreclosure and is now owned by the bank is referred to as "bank-owned." Through a deed in lieu of foreclosure, banks can also acquire property ownership. This property type is also known as real estate owned (REO).

Once a bank acquires ownership of a property, that property can be listed for sale. Homebuyers or real estate investors can purchase bank-owned real estate, often at a discount if the home requires extensive repairs or renovations to be habitable.

• Alternative designation: owned real estate

• Acronym: REO

There are various situations in which a property may become bank-owned. For example, suppose you receive a promotion at work and decide to purchase a $400,000 home. A year later, you lose your job and are unable to make your mortgage payments. You default on the mortgage, which ultimately leads to foreclosure, after which the bank regains ownership of the property.

Bank-owned property is distinct from custodial property, which consists of abandoned borrower-owned property.

KEY TAKEAWAYS

• Bank-owned property, also known as real estate owned (REO) property, refers to properties that were not sold during a foreclosure sale and are therefore added to the inventory of the bank that initiated the foreclosure.

• Bank-owned real estate typically features low interest rates and modest down payments.

• The purchase of a bank-owned property may take longer than the purchase of a non-bank-owned property.

• Bank-owned property is real estate that has undergone foreclosure and is now owned by a bank instead of the original borrower.

• Bank-owned or real estate-owned (REO) properties can be an attractive option for homebuyers and real estate investors seeking to purchase homes at a discount.

• If bank-owned properties are priced significantly below market value, they may attract more competition from other buyers.

• Prior to purchasing a bank-owned property, it is essential to comprehend the investment, as well as the potential risks and returns associated with that investment.

Understanding Bank-Owned Property

Bank-owned properties are properties added to a bank's inventory after failing to sell at a foreclosure sale or auction. A financial institution acquires a bank-owned property when a homeowner defaults on their mortgage. As a result, these properties are sold at a substantial discount compared to current home prices, as buyers are wary of potential repair costs.

The majority of bank-owned properties for sale have low interest rates and low down payments. Potential homebuyers and investors can access listings of bank-owned properties via the online service RealtyTrac or by contacting lenders directly. Additionally, large national lending institutions have departments for loss mitigation that sell these properties.

These properties may be held by a bank, credit union, or other financial institution that provides loan services, such as mortgages. Generally, the process will begin by adhering to the lender's policy regarding the transition into foreclosure. For example, the lender may have a grace period for missed payments before transferring the property into foreclosure. The missed payment schedule may include as few as three missed payments, depending on the lender. If the borrower fails to make subsequent mortgage payments, the property is then sold at auction. If a property does not sell at a foreclosure auction, the property is transferred to the bank, which becomes the new owner.

Before proceeding with any financial aspects of improving or managing a property, an investor who purchases a property from a bank should verify that the title is clear.

Once a property has been transferred to the bank, the bank is able to clear the title. Under the bank's ownership, the lender may make structural and cosmetic repairs as well as relist the property with a real estate company that specializes in foreclosures or a general real estate company.

If you are interested in purchasing a bank-owned property, you should be aware that the transaction may take longer than usual. Frequently, the timeline is extended, which can make closing the sale a lengthy process, as the bank wants to ensure the transaction is secure in order to avoid another foreclosure, minimize losses, and maximize profits.

How Bank-Owned Property Works

Prior to a property becoming bank-owned, it must first undergo the foreclosure process. In general, lenders can pursue foreclosure when a homeowner fails to make their mortgage payments, although state-specific regulations vary. Depending on the state, the lender may be required to file a lawsuit in order to reclaim the property, a process known as judicial foreclosure.

The bank will attempt to sell the property at public auction as part of the foreclosure process. If the property is sold, the bank is able to recoup a portion of the financial loss caused by the foreclosure. If the property fails to sell at auction, the bank will acquire ownership.

At this point, the bank is still interested in recovering a portion of its initial investment in order to list the property for sale. Depending on the property's condition and the amount of money the bank is out for the unpaid mortgage, the listing price may vary. Due to the bank's eagerness to rid itself of these liabilities, bank-owned properties are frequently available at a discount.

Real estate owned foreclosure sales may attract homebuyers and/or real estate investors in search of discounted properties. For instance, you may wish to acquire a property in need of repair that you can rent out for passive income. So you scour local bank-owned property listings and discover a home that is selling for $100,000 less than comparable properties in the region.

From this point forward, purchasing a bank-owned property is identical to the purchase of any other property. Unless you intend to pay cash, you will need to find a lender who will approve your mortgage application. Additionally, you would need to have the home appraised and inspected, and conduct a title search to ensure there are no liens or claims against the property.

Obtaining a mortgage preapproval from the same bank that owns the property could expedite the purchase process.

What to Consider When Purchasing a Bank-Owned Home

Real estate investors interested in purchasing bargains and converting them into cash-flow assets may find bank-owned properties to be attractive.

Try a website such as RealtyTrac, check with your local tax office, or contact banks directly to determine if they have any properties for sale. You can also search for government-backed home auctions through one of these organizations:

• United States Department of Veterans Affairs

• Fannie Mae

• Agency for Agriculture

• Housing and Urban Development Department

• Federal Deposit Insurance Agency

However, there are a few things to consider when considering this investment opportunity.

Consider beyond the initial purchase price the amount of additional investment required to make the home habitable and rentable.

The bank may make minor cosmetic upgrades or improvements to make the property more appealing to buyers, but you may be responsible for larger issues or repairs.

This is why an appraisal and inspection are essential when purchasing a bank-owned property, regardless of whether you intend to live in it or rent it out. You do not want to purchase a real estate owned property only to discover after the fact that the roof will need to be replaced for $25,000 and the HVAC system for $10,000.

Considering the numbers beforehand can help you determine whether purchasing a bank-owned property is a good investment and how much of a return you can expect if you plan to rent the property or sell it. Also, unlike the purchase of a conventional home, bank-owned properties may offer less room for negotiation. There may be less incentive for the bank to make concessions if there are multiple potential buyers.

Before approving the purchase of a bank-owned property, you should consider consulting with a real estate attorney or other property expert to review the terms of the contract.