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In today's market, nearly four out of every five homes sold are bank-owned foreclosure properties. These are commonly referred to as Real Estate Owned (REO) properties

What is an REO or bank-owned property?

A property acquired in foreclosure and now owned by the bank that foreclosed on the property is called an REO or bank-owned property.
How did this property become an REO?
The last owner of this home was not able the mortgage payments.   The mortgage note holder seized the property and evicted the owner.  The bank attempted to auction the property and pay off the existing liens and mortgages.  If that was not successful, the bank was then deeded the property by the Trustee.  It is now an REO property.
How do banks sell REO properties? 
The banks are not in the real estate holding business so they must sell these homes and turn them into cash.   Because most foreclosed properties are not successful at auction, REO properties have flooded the market.
In any market, if there is oversupply, the property values depreciate.  Because of the depreciated market, the banks are going to take, in most cases, a substantial loss on the property. 
The banks have independent, professional real estate agents that assist them is marketing and selling their REO inventory.   The banks also assign asset managers who work closely with these agents.
How do banks price their REO properties?
When a bank takes over a property, they conduct their own due diligence to get an accurate idea of the value of the home. 
They hire a team of people to assess the current market value of Real Estate Broker Price Opinions (BPO)they typically price the home within 10% of the current market value

 

Banks are in business to make money.

If they cannot make money, they need to minimize their losses.  Banks are looking for a certain "net amount" on each particular property. This "net amount" is based on their research of the current market value minus costs associated with the property.  They have priced the home sell quickly but as close to market price as possible.
Many buyers make the mistake of thinking the bank is desperate to get rid of the property.  They believe they can submit a low-ball offer and expect to get an acceptance or at least a counter-offer. Think again!  Low-ball offers (below 10% of list price) are not typically taken seriously.  They may be a waste of your time and your agent's.  Worse yet, you may be perceived as an illegitimate buyer.  Banks own many homes in the same area, and they use many of the same agents, so this could adversely affect future offers you make on other properties owned by the same bank or listed with the same agents.
Be reasonable.  Do your research with your agent and determine what the home is really worth.  Make your offer according to the home's value, not to list price.
There are stories of buyers making tens of offers and not having a single one accepted.   By making offers based on the home's true value and not what it's listed for, you can mostly avoid this challenge.

Are REO properties damaged?

Some are.  Many are not.   It is important to inspect the home yourself before making an offer.  Once you have viewed the property, consult with your lender about the damage the home has, if any. 
It is equally important to have a professional home inspector inspect the property before you commit to purchasing it.   Your real estate professional will refer you to a top quality home inspector.  When the inspection is complete, your lender will likely want to review a copy of it.   They do this to protect you and their loan collateral, your new home.
Many loan programs will require repairs to be completed before you close escrow.   If you do not have the money to do this and the selling bank is not willing to make these repairs, you may need to find another home.
What does "As-Is" mean?
Nearly every bank-owned property today is sold "as is."   You will have to sign a waiver that states you are willing to accept the home in the condition it's in with no further repair.
If a bank is marketing their home "as is", there is a possibility that the home needs repair and they are not willing to make them.

 

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