REO Properties: How to Find and Buy Bank-Owned Homes

People who plan to move aren't the only ones who put their homes up for sale. Lenders also list houses on the market.

Bank-owned homes — also known as real-estate owned (REO) properties — may be worth considering as a first-time or move-up buyer. Lenders are motivated to unload these homes and are inclined to offer fair prices.

Here's what to know about finding and buying a house that's owned by a bank.

What is an REO property?

Bank-owned or REO properties are foreclosed homes that were repossessed by lenders. Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase mortgages from lenders, also have REO properties. The term "real-estate owned" comes from an accounting term — "other real estate owned" — used on bank financial statements. Nonbank mortgage companies sell all the mortgages they originate and don't own REO properties.

Here's how a home becomes an REO property:

• After a borrower fails to make mortgage payments for a certain period, a lender can begin the foreclosure process.

• The lender issues a notice of default, then later, if the borrower still hasn't made payment, a notice of sale.

• Unless the borrower comes up with the money, the home is offered for sale at a public auction.

• If the house doesn't sell at auction, the bank takes possession of the property and sells it to traditional home buyers or real estate investors.

A home can also become bank-owned if the lender accepts a deed in lieu of foreclosure.