Risks of Buying REO Property

by Anna Assad, Demand Media

REO properties may contain garbage and some of the former owner's belongings.

Buying a real estate owned home is often tempting because of the savings potential. Lenders with REO properties usually want to sell as soon as possible to avoid the cost and hassle of ownership, and that is reflected in their pricing. While buying a REO property comes with the risks you'd have under a traditional sale, there are some extra warnings involved.

Poor Condition

An REO home is often the result of a foreclosure that no one wanted at auction. It may have damage from vandals, the elements or the prior owners. Lenders sometimes have REO homes that have sat vacant for months or even years, increasing the chances of damage and problems such as pest infestation. While you may have the chance to get a home inspection before buying, the cost is usually your responsibility, and the lender normally won't make any corrections, selling the home "as is."

Rough Transaction

The process for buying REOs is different from traditional property buying and may take longer. Using an inexperienced real estate agent can make matters worse, since the agent must follow the selling lender's specific process for submitting offers and closing the deal. Transaction problems can cost you time and even money if the agent misses deadlines and you lose the home and any nonrefundable cash you spent.

Underpricing and Overpricing

Lenders may intentionally underprice a home to attract buyers quickly because it needs substantial repairs or has costly issues, such as illegal tenants, that the lender doesn't want to deal with. You may find yourself with a huge repair bill and other headaches for a cheap REO you bought. Overpricing may happen in cases where the lender based selling information on outdated property reports instead of the current state of the home and its neighborhood.

Squatters

Abandoned homes may attract squatters, people who have moved into the home illegally. While the lender, as the owner, has the right to evict squatters from REO properties, it may become your problem if the lender fails to do so and you become the new owner. You'll have to go through the area's court eviction process, which may take months to complete and cost you money in legal and filing fees. Meanwhile, the squatters may continue to damage the home until you can have them removed.