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Foreclosure sign in front of a house

How to find REO properties

No matter where you are along you're homeownership journey, you've likely come across many new or unusual terms and phrases. One of them is typically expressed as an abbreviation: REO.

If you're looking to buy a home for sale at an affordable price - which can be said for most people in the real estate market - it can really pay off to know more about what REO properties are and where you can find them.

What's an REO property?

Short for real estate owned, REO properties are essentially foreclosed homes. When homeowners are unable to make their mortgage payments on time for a few months or longer, they receive a notice of default and, if payments continue to go unpaid, their houses go into foreclosure.

This means that the financial institution that provided the original loan assumes ownership. Much like homeownership itself, foreclosure is a process that can take several months to finish. REO is a shorthand way of indicating the transferral in ownership is complete.

During the financial crisis and the recession that followed, REO properties were fairly common in the U.S., with foreclosure starts topping 2 million nationwide back in 2009, according to ATTOM Data Solutions. They're nowhere near as prevalent today, thanks in large measure to the economy being in better shape and more rigorous mortgage approval standards.

Fewer than 500,000 homeowners were foreclosed upon last year, based on the most recent annual available from ATTOM. They continue to fall on a year-over-year basis, with nearly 55,000 default notices, scheduled auctions and bank repossessions recorded in February. That's the eighth consecutive month in which foreclosure filings fell on an annual basis.

The fact that REO listings are less common is an encouraging development, mainly because it's an indication that more Americans are in sound financial shape and paying off their monthly mortgage bills on schedule. Going into foreclosure can wreak havoc on one's credit score, making it more difficult for them to borrow money at an affordable rate of interest.

Why should you buy a REO or foreclosed property?

The one positive aspect about REOs, particularly for those who are in the market for the first time, is that once they go to public auction, they typically sell at price points well below market value.

Lenders do this in order to make bank-owned properties more appealing to buy and because foreclosures may not be "move-in ready," perhaps in need of some refurbishing to get them back in tip-top shape.

Thus, a single-family residence that originally sold for $250,000 may be listed for $200,000 as a foreclosure. Sometimes the price is more, perhaps even less. As with most aspects of residential real estate, what you spend is largely contingent on the circumstances of the moment and the local marketplace.

How do you buy a REO or foreclosed property?

Going about finding foreclosure listings is fairly similar to the process for the typical housing hunt.

Mobile apps, real estate listing websites and other online search tools will often categorize foreclosures as their own separate entity so shoppers can identify them more expeditiously by checking off the appropriate boxes.

Alternatively, many real estate agents specialize in foreclosed homes. Getting in touch with them can provide you with leads about new units in public auction and what you should be mindful of should you decide to purchase the property.

Much like existing, recently renovated or brand new houses, you never know when the next REO property will become available, but you can be sure they will. They're more common in certain portions of the country than others.

For instance, New Jersey currently has the highest foreclosure rate, accounting for 1 in every 1,006 housing units in February, according to separate analysis from ATTOM Data Solutions. Second to the Garden State was Delaware at one in every 1,008, followed by Maryland (one in 1,193), Florida (one in 1,365) and Illinois (one in 1,465).

As with any home purchase, buying an REO property should not be taken lightly. Although they usually sell for less, it quite possibly could be the most money you'll ever spend on a single purchase, so it's important to enter the process fully informed.

Here are a few things to keep in mind:

Understand your mortgage options

Generally speaking, you should be able to finance an REO, assuming you have the appropriate qualifications and are creditworthy. However, if the property you're interested in is not in livable condition - usually due to poor upkeep by the previous tenants - traditional financing may not be an option. This means that you may only be able to buy it with cash. It's another reason why your best move is to go through a real estate agent; they can fill you in on all the details that you may miss by going it alone.

Know what you're up against

Because demand currently outstrips supply, you may be in competition with others for the real estate owned property. Some of these individuals may be investors, who buy the listing with cash and then resell it after making various strategic renovations. This shouldn't dissuade you from making an offer, but it's always good to enter the process knowing what you're up against.

Have house inspected

Home inspection is standard operating procedure before buying a house, but it's especially important prior to finalizing a deal on a foreclosure. There may be structural issues that need to be addressed before you sign on the dotted line.

Talk with a trusted real estate agent or lender to learn more about REO properties - they just may be the pricing opportunity that you've been waiting for.