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Foreclosure Auction Or Bank Owned REO – Which One is Better and Why?

Real estate investors and first-time home buyers can expect to find great bargains on residential properties at foreclosure auctions and bank REO listings.

Buying at a Foreclosure Auction is Risky

Depending on the state’s foreclosure laws, the distressed property goes through the pre-foreclosure process that ultimately leads to a public auction. At the foreclosure auction, the property is offered for bidding to potential buyers at a reserve price set by the mortgage note holder.

The auction reserve price is usually set at an amount that is equal to the sum of the outstanding loan balance, accrued interest and any other expenses and costs the lender incurred due to the foreclosure proceedings. Once tallied up, this reserve or minimum needed amount leaves very little equity cushion to entice a bid from real estate investor. The buyer will also not get a formal opportunity to go and visit the interior of the property to make an assessment its condition.

According to the terms set by the auctioneer, a deposit amount needs to be posted immediately. Only those investors with good experience and deep pockets can afford to pay the 10% reserve price that needs to be immediately posted after shouting a winning bid. Upon making a successful bid and paying the full amount, the property may not immediately come into the possession of the buyer.

If previous owners or occupants are still living at the foreclosed property, the buyer will have to follow eviction procedures to gain access and control of the property. The buyer will also have to resolve any other liens placed against the property to gain legal title. Due to these issues, many investors stay back from buying properties from a foreclosure auction.

Now it’s a Bank Owned REO property

Any unsold properties after the auction come under the ownership of the bank holding the mortgage lien. All such bank owned residential properties are commonly referred as REO (Real Estate Owned).

The bank may have to evict the previous owners, perform any necessary repairs and resolve any other liens against the property. The bank will also handle any other steps that need to be completed before gaining full access and possession of the subject property. These actions must be performed and all issues must be resolved in order to get a clean title for the REO home.

At this point, the bank’s primary motive is to maximize the amount at which it sells the property while minimizing holding expenses caused due to property taxes and maintenance costs. Large banks and lenders usually have their own dedicated internal REO departments to handle all aspects related to REO home sales. Some lenders may choose to outsource this process to asset management companies that specialize in maintaining and selling REO homes.

An investor must do his homework before proceeding to make an offer to purchase a bank reo. A thorough analysis of the property’s condition will help the investor identify all needed repairs and determine their relative costs.