“How the does REO purchase process work?’  that’s a question we’re asked quite often at Coldwell Banker NRT Development Advisors.  Though the process may seem daunting at first, it’s really not that different from the traditional home purchase process.  And the payoff can be big.

REO stands for “real estate owned.”  When a buyer cannot keep mortgage payments current and therefore a bank takes over as owner of the property, the property is considered REO.

Following are the five main steps to purchasing an REO property.

Step 1:  Get your financing in order.  When considering an offer for an REO property, banks will look at many factors in addition to the asking price – including pre-approved financing, substantial downpayments  and credit history.  Consult with your tax or financial advisor in advance to assess your financial situation and determine your target price range.

Step 2: Make an offer.  While banks are often motivated to sell REO, they’re not going to just give homes away.  When you find the ideal REO home for you, come prepared with a realistic offer in order to be taken seriously as a buyer.  A buyer’s agent can help you put together an acceptable offer that takes into consideration current market condition and comps, meets the requirements of the lender, and still offers you – the buyer- real savings.  Make sure your offer includes an inspection and appraisal contingency that allows you to withdraw should the inspection reveal major problems.

Step 3: Make the most of the escrow period.  Just like traditional real estate transactions, buyers have the right to back out of the contract within the contractual time if they find something wrong with the home, so make sure that you know what that time frame is.

REO properties rarely come with a seller’s disclosure, as the actual seller is now the bank, which hasn’t lived at the property to know the day-to-day conditions.  Therefore, it’s wise to have an inspection done.  If you find something wrong, most REO contracts will include a right to cancel and receive your deposit back within a set period of time, which is often 10 days.

But due to the current economy, REO properties run the gamut of conditions.  So many of the REO properties on the market now are new construction homes that don’t carry any baggage of past owners.

Step 4: Be prepared for the waiting period, and possible a counter offer.  Buyers must recognize that they are dealing with a large group of people and not just one seller; therefore buyers need to be patient throughout the REO purchase process.  It may take as few as 7 days or as much as two months before you hear back from the bank.  The listing agent should be able to provide insight about how long the process will take with the individual bank.  Ofter, banks will counter the bid, in effort to receive a higher offer to cover their costs and also show investors that they’re attempting to get the highest price for the property.

Step 5: Get ready for a quick closing.  Once an offer is accepted, the bank may need four to five days business days to obtain final approval.  But once the offer is approved, the closing process will move quickly.  Many banks will ask for a closing within 10 to 30 days, and then it’s home sweet home!