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How to buy a REO property

If you're a homebuyer hoping to find a great deal on a Real Estate Owned (REO) home, you might have to work a little harder this year because they're becoming harder to find.

According to the Federal Reserve, sales of REOs represented only 14 percent of all sales in 2012, down from 21 percent just two years earlier. Shawn Miller, a Realtor and REO specialist at Crye-Leike Real Estate Services in Atlanta, says the downward trend appears to be continuing.

REOs are homes that went through the foreclosure process, were claimed by the bank and are now back on the market. Banks that want to get rid of their home inventory often sell these properties at a discount, says Miller.

Where to find them

Although REO inventory may be down, it's no secret where to look to find these properties, says Deb Tomaro, a Realtor with RE/MAX Acclaimed Properties in Bloomington, Ind.

"If a bank wants to sell a property and it's ready to be sold, meaning liens and judgments are cleared up, the bank will likely list the property in the area's MLS (multiple listing service)," she says.

If you find a new listing and it's a Fannie Mae- or Freddie Mac-owned REO, you might have access to the First Look program, which gives potential owner occupants, certain non-profits and community entities a chance to have their offers considered ahead of other buyers.

With the goal being to encourage homeownership, the "First Look" marketing period generally lasts for the first 15 days (30 in Nevada) that a home is on the market, Miller says. It gives buyers the best chance to grab an REO deal. After the exclusive period, homebuyers would have to compete with investors, who often have deep pockets, he says.

Discounted real estate alternatives

REOs aren't the only options for finding a home at a discounted price. Other types of distressed real estate like short sales and foreclosures also sell at below-market values.

Before a property becomes an REO, it goes through the foreclosure process. This involves being offered for sale at an auction. If you find a property you like, you may be able to make an offer for it at the auction steps, Miller says. But be warned -- you'll be competing against experienced investors. This option is generally better for buyers who have a lot of familiarity buying foreclosures, he says.

A short sale -- when a homeowner sells their property back to the bank for less than the remaining mortgage balance -- is another option.

"Banks are more willing to work with short sales where they have not been in the past," says Miller. Short sales are often in better condition than REOs because the occupants are still in the home and usually drive the sale, Miller says.

However, while an REO sale can be completed in a time that's comparable to a normal sale, often within 30 to 60 days, short sales often take longer than 90 days to close, says Miller.

Qualifying for an REO home purchase

The financial requirements for REOs are generally no different from the requirements for a home loan on any other property, says Glenn Toher, director of sales for DLJ Financial in Irvine, Calif.

"Make sure you are pre-approved for a loan before making an offer," says Toher. "When opportunity strikes, you have to be ready. Getting pre-approved for financing is more important now than it's ever been."

REO properties are generally sold "as is," which means the bank selling the property won't be doing any repairs on the home. If the property is in very bad condition, your mortgage lender may refuse to issue a loan for the property -- just as they would likely refuse to issue a home loan on a damaged non-REO property, Toher says.

Buying an REO can be a smart move if you're looking for a good price on a distressed piece of real estate. But as with any distressed property, you have to be patient and wait for the right deal to come along. "A buyer is not in the driver's seat," says Tomaro. "You need to be able to go with the flow and not have any hard and fast deadlines."

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