REO stands for real estate owned and is industry jargon for foreclosure property repossessed by banks or lenders. A foreclosure and an REO are the same thing -- but REO indicates the end of the foreclosure process.

Essentially, there are three different stages at which you can buy a foreclosure property. Investors and homebuyers can purchase a foreclosure property in the first phase of default — before a foreclosure auction takes place. Secondly, investors can purchase a property at the public foreclosure auction. And finally, a foreclosure property can be purchased from the bank or lending institution if no one bids at the public sale and the bank repossesses the property.

If a lender or bank is the highest bidder at a foreclosure auction — or if no third party bids at the auction — the property reverts back to the lender and becomes an REO. Although the lender is often a bank, credit unions, mortgage companies and other financial organizations can also lend money to purchase properties -- and foreclose on them if they need to.

Once a property is repossessed by a bank or lender, the property will probably be listed for sale through a real estate agent. Good buys are available, but they require research, preparation, patience and persistence. Buying a home in foreclosure isn't easy, and it's hardly without risk. Before you consider plunging into the foreclosure market, be sure to do some in-depth research.

Most foreclosure properties are referred to by investors as "distressed" properties. REO properties are sold "as is," meaning the lender who now owns the property will not agree to fix any damages or deficiencies.  Most purchase agreements, however, give the buyer a certain number of days to inspect the property and the rite to cancel the sale (or negotiate a lower price) if something they discover is not acceptable.  Many owners of homes that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender frequently damage the property. So be prepared to do renovations and repairs. Hire a licensed home inspector to give you a written estimate of the cost to repair the property.  Repair costs can be used later in your negotiation with the bank to reduce the asking price.

Once you have found a home you want to buy, search the public records for liens and outstanding taxes. Your real estate agent can help you do this.  Prospective buyers of REO properties typically do not have to worry about cloudy titles, back taxes or other surprises, since the lender will almost always take care of them before closing.

Common liens typically are placed on a property for unpaid loans borrowed against the property, taxes or unpaid contractors (mechanics liens).  These liens remain intact until the money is paid. Banks should clear the title before selling but never assume this is the case — just as you would if you were buying a property from anyone else.

Don’t be Afraid to Negotiate

Investors should be prepared to negotiate a lower down payment, a lower interest rate, a reduction in closing costs and a lower asking price.  Many mortgage lenders may be willing to waive some closing costs, maybe even offer a break on the interest rate or the down payment. Don't be afraid to ask for a better price and favorable terms.

Making Your Offer

  What About Financing?

Lenders typically accept less money down for the purchase of REO properties and will also often pay for closing costs and provide other incentives -- so be sure to ask!   With good credit, many banks will loan the full price of the foreclosure or more.   Foreclosure investors with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required.