REO

• When a borrower faces foreclosure, and signs the deed over to the lender to settle the mortgage debt;
• The lender repossesses the property; or
• The lender purchases the property at a public auction of foreclosed properties.

Many properties owned by lenders are sold at below-market rates. When the lender acquires a property, they automatically inherit a financial cushion. When a property goes into foreclosure, or is repossessed, the previous owner forfeits both the down payment and the accumulated equity, both of which now belong to the lender. This cushion gives the lender the ability to sell property quickly and below market value, because the remaining balance of the mortgage is often less than the market value.

Properties sold by lenders may require some additional repair work. Because many REO properties are sold as-is, have the space inspected. Although the lender will not repair the problems uncovered by the inspection, and might not renegotiate the offer, an inspection will give you an idea of how much additional cash you will have to invest in the property to make it habitable.

You can make your purchase offer contingent on the results of the inspection. If the inspection report does not meet your requirements, or the costs exceed your budget, you are not required to purchase the property. Depending on the stipulations of the sale, you might also be able to lower your offer if the property requires substantial rehabilitation. For more information on building inspections, see Chapter 18: Inspections.

Contact lenders directly to see if they have properties for sale, and where you can obtain purchase information.