REO vs. Foreclosure: Differences, Benefits & Limitations
‘REO’ and ‘foreclosure’ are two terms you may commonly come across when you are in the market for a new home. These terms are often used interchangeably or mistaken to mean the same thing, but they are essentially different by definition. REO is the acronym for Real Estate Owned and refers to property that has already been foreclosed and is owned by a bank or other financial institution. It is also referred to as a foreclosed property. Foreclosure, on the other hand, is the legal process wherein a property goes up for sale because the owner has defaulted on their payments or failed to comply with the mortgage agreement.
Choosing between REO properties and foreclosures is often a challenge, and your decision may depend largely upon your preferences. As buying a property is a major investment, you need to first understand the significant differences between foreclosures and REO properties. A few facts can help you make well-informed decisions.
- The market prices of REO properties are relatively lower than foreclosures. This is because the mortgage lender tries to sell the property as soon as possible to make up for the liabilities incurred in acquiring it. But with foreclosed properties, you need to start with a minimum bid, and this minimum bid is usually equivalent to, or sometimes even more than, the value of the property itself.
- When it comes to a foreclosure, you may not always be able to inspect the property or assess its actual worth. But in the case of REO properties, you can enjoy the privilege of inspecting the property first. You may also be allowed to bring along home inspectors to appraise the property and estimate its worth.
- Also, the selling process in REO and foreclosure properties is considerably different. Foreclosures start off with a minimum bid from your end, and in order to be able to bid, you must possess the full amount of the bid in the form of a cashier’s check. If your bid wins, the property is handed over ‘as-is’ along with other financial attachments (handed down by the earlier owner(s) along with the property). But this in not the case with REO properties. There is usually a lot of competition for these properties since they come with clean titles and a good price. So, acquiring these properties is generally not very easy.
Both foreclosures and REO properties have their pros and cons. And you may choose either of these depending on your preferences. However, it is important to remember that foreclosures come with a number of additional costs—like liabilities attached to the property, if any. So these typically favor investors more than those looking for a home to live in. While this should not deter you from considering them, it is essential that you weigh the benefits and limitations of both in order to be able to make the right choice.
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