Buying Lender Foreclosures or REOs

Purchasing a home from a lender that foreclosed on the property may appear to present an opportunity and may, in fact, turn out to be one. However, there are risks attached to purchasing lender foreclosures, also known as REOs (Real Estate Owned).

Following are some things to consider before making an offer to purchase an REO:

  • A percentage of owners vandalize or sabotage the property out of spite before it goes back to the lender. While it is illegal and highly unethical, some leave scorched earth by doing the following:

  • Pouring concrete into plumbing fixtures and both interior and exterior drains;

  • Removing roof tiles, creating holes, and then replacing the tiles;

  • Cutting low voltage wires;

  • Fraying high voltage electrical wires in locations not likely to be seen such as attics;

  • Creating leaks in air conditioning condensation lines that can lead to water damage and mold; and

  • Damaging underground irrigation systems;

  • Foreclosure homes are sold in "as is" condition by former lenders that never occupied the property. Consequently, you must rely on your own inspection to a much higher degree than when you purchase from someone who has been living in the property and is obligated by law to disclose everything that would effect prospect’s decision to buy or not to buy, and the price he or she would agree to pay.

  • Foreclosure homes are properties that no one purchased at the public foreclosure auction.

  • The cost of repairs must be paid with cash. You cannot include such costs in the loan amount.

If you decide to make an offer on a foreclosed property, you should hire a licensed general contractor to inspect the entire property before making a commitment. Caution is highly advised.