Real Estate Owned Key Terms

Avoid any costly mistakes by understanding REO sale terminology

By Virginia Franco, Freelance Writer

Real estate owned (REO) properties are those owned by the mortgage company after a foreclosure auction that did not result in a sale. REO properties are common as a result of their accompanying large amounts of money owed to the bank that keep shoppers looking for a bargain during foreclosure auctions. It is important to have a working knowledge of real estate owned key terms prior to investing in real estate owned properties. A lack of understanding can wind up costing you big bucks.

Property lien

A lien on the property can be obtained by the property owner to ensure ownership rights in case payments are not made. In most cases the bank or mortgage company is the property lien holder. During an REO transaction, all price and closing negotiations will be held with the lien holder, or the bank.
Try: The 'Lectric Law Library provides the legal definition of a lien and explains how the definition applies to property.

Title insurance

Title insurance protects you against any claims or legal fees that may arise as a result of actions on the part of a property's previous owners. Examples include a claim to your property's land or a forged signature on a previous title that has been brought to light years later. REO purchases generally come with a title insurance policy as well as the chance to investigate a property's history.
Try: Jack Guttentag's site entitled "The Mortgage Professor" answers many common title insurance questions.

As is condition

Most banks offer REO properties for sale in "as is" condition, which means what you see is what you get. Purchasing "as is" can be risky, so REO buyers are advised to pay for inspections out of pocket and try to negotiate repairs with the bank.
Try: ThinkGlink's article "What Does Buying a Home in 'As Is' Condition Really Mean?" explains the concept of "as is."

Section 1 pest certification

Most pest reports classify conditions as Section 1 or Section 2 items. A Section 1 certification means an inspector found no live insects causing damage to your property. Most banks will comply with paying for a Section 1 pest certification, but only if you ask for it and include it as part of your negotiations.
Try: The section dealing with pest certification in Red Oak Realty's JustSellMyHouse article applies to REO transactions.

Inspection contingency period

It is highly recommended that any REO offer you make include an inspection contingency period, which is essentially a pre-determined amount of time you can use to rescind your offer if any inspections turn up a deal-breaker item for you.
Try: This News & Record and Landmark Communications article entitled "Homebuying 101: Market still holds opportunity," explains the REO purchasing process, including the importance of negotiating a contingency period for inspections to reveal any problems.

Property disclosure statement

All sellers are required by state law to disclose any known defects to a buyer regardless of the type of property sales. This is even true when a property is an REO and/or is sold in "as is" condition.
Try: The Arizona Association of Realtors explains the role of disclosure statements in an REO sale in its "REO Disclosure Obligations" section.