What is an REO?

Source: Christopher J. Coiro, Esq.

My guess is that if you have been a real estate broker for at least a couple years, you have experienced the standard real estate transaction whereby Jim buys from Mary, Mary pays off her mortgage and walks away with some money in her pocket. I am also guessing that many of you have also experienced short sales whereby Jim buys from Mary but the home is not worth what Mary owes on the house so she pays the bank less (with the bank’s permission of course) in order to sell the home. Yet, I am guessing many of you have not experienced an REO.


REO stands for Real Estate Owned and although it would sound as if that means a realtor owns the home, it really means the bank has foreclosed on the home and now owns it. Banks taking ownership of these homes happens more often than not at foreclosure auctions because the bank is the only party willing to bid up to what the bank is owed on the house because odds are, the bank is owed more than the house is currently worth. The bank does not want to keep this home so they eventually put it on the market to be sold. While on the market, it is referred to as an REO or bank owned property.

An REO deal and REO contract are extremely different than just about any other deal you will be involved in. The REO contract is probably one of the longest residential real estate contracts out there and it is about as one-sided as it gets (of course in the bank's favor). It also has the potential to be one of the quickest deals around because you are not waiting for a seller to move out or to close on their purchase and you are not waiting on bank approval once you are in contract. Basically, as soon as the buyer is ready with his/her mortgage, the closing can take place.

An REO also offers the buyer a great opportunity to get a very good bargain. Keep in mind that the bank does not want to hold onto inventory and although they are unwilling to give houses away, they also do not want to be paying the taxes and maintenance every month. An REO will typically be in bad shape because the previous homeowner who was thrown out of their home has probably trashed the place and stolen everything they can get their hands on including the appliances, copper piping, flooring, etc. And whatever the previous owner left behind, there is a good chance that someone has broken into the home and taken the remaining items which have any value whatsoever. Therefore, a person buying an REO has to assume work will be necessary and the price they offer should reflect that.

Now I would like to provide you with some of the differences between an REO contract and any other residential real estate contract. I do want to stress that the differences I will be stating below are ones I find in many REO contracts but it does not mean they will be in every contract. Therefore, you should not assume that these differences apply to your deal but instead, should refer to the real estate contract for each specific deal.

1. Transfer tax for an REO is typically paid by the buyer unlike most standard deals where the seller pays the transfer tax. Transfer tax is calculated by taking the sales price dividing it by 1000, and multiplying by 4. It is usually something that no buyer ever thinks about taking into account when making an offer on an REO because they probably are not aware of what transfer tax is let alone know who is typically responsible for it. Therefore, a realtor may want to offer as part of its negotiation that the seller be responsible for the transfer tax or advise the buyer that they will be responsible for the transfer tax and that their offer should take that into account.

2. On an REO, if the buyer uses the title company recommended by the seller, the seller will pay the fee insurance portion of the title bill. On a standard deal the buyer is usually responsible for this fee which depending on the purchase price can easily be a couple thousand dollars. Yet, if the buyer of an REO is willing to use the seller's recommended title insurance company, the seller will cover the fee policy. Of course, as a buyer’s attorney I am not a fan of this because this forces my hand to use a title company I am not familiar with but when the client is presented with the option, they almost always will go with the title company that will save them money.

3. The closing date on an REO is usually on or before as opposed to on or about which means unlike your standard deal where you have that 30 day window, the REO does not give that flexibility. You must close by the date in the contract and if you do not, the buyer could be subject to daily penalties, which I have seen as high as $200 per day. Fortunately, the selling bank will usually grant an extension without a penalty if they see that the buyer is undertaking all necessary measures to get a loan but there is no guarantee that the seller will do this.

4. A buyer on an REO is taking the house AS IS and usually as is as of the date of closing. In other words, whatever condition it is on the closing date, that is the condition you take it in. Do not expect the seller to fix anything and do not assume everything will be working. Nonetheless, banks have been willing to fix things if something horrible has occurred but once again, they will not commit to this in the contract.

5. Inspection of home - Typically we are accustomed to the buyer having to do the home inspection prior to entering into contract. REO contracts usually give the buyer a 10 day window of performing the inspection post-contract and allowing the buyer to back out based on the results of the inspection. Despite this, I would always suggest that the inspection be performed before execution of contracts because if it is performed afterwards, we now have to rely on the seller’s attorney returning the buyer’s downpayment.

6. REO homes will almost always have the water turned off and winterized and in many instances, the power will also be off. If the buyer wants them on for inspection purposes, it will probably be at the buyer's expense to turn them on and then off again.

7. As with the condition of the home, the buyer is taking it as is regarding Certificates of Occupancy, open permits, violations, etc. The bank will not be obtaining any of these and the buyer can not back out because the house does not have all of its COs. Therefore, if you have a client putting in a bid on a house, it may be wise to go down to the Town and find out exactly what COs exist and make sure there are no open permits.

8. On an REO, if the seller defaults, the only penalty is that the seller must give the down payment back to the buyer. In other words, the bank can back out at any time without penalty. This of course is not the case with your standard deal. Nonetheless, once the bank is in contract, I have never seen them try to back out.These are a few of the many differences. I suggest with REO's that you educate your customers on the potential differences this way it does not come as any great surprise when they are ready to sign contracts. If you have any questions regarding REOs, please do not hesitate to contact me at 631-622-7700 or coiropc@optonline.net.

Christopher J. Coiro, Esq.
330 Motor Parkway – Suite 110
Hauppauge, N.Y. 11788
631-622-7700