Should I look into an REO first?

[Patrick H.]

I was going to stop by a few banks to get pre-qualified (or at least see what I qualify for) and talk to them about any homes they are selling.

Since REO's have potential unknown liability issues, is it more likely a "you get what you pay for" situation.

A home may have a price of $250k, but have an estimated value of $300k (based on size, age, neigborhood, etc), but that means the bank estimates there is $50k worth of liability (whether that is unknown debt or repairs).

[J Scott]

Sounds like you have a few misconceptions about REOs. Here are some things to consider:

- REOs come with clear title and title insurance. This means that there are no "unknown liabilities." All liens, claims, etc are paid off and/or protected against, so basically you're getting a house with a perfectly clean title and no liability issues (there is always some risk, but no more with an REO than any other property you might purchase).

- Generally, REOs are going to need more renovation than a house you purchase from a retail seller. There are two reasons for this:

1. The property was last inhabited by people who were getting kicked out, and sometimes people in that situation will purposefully do damage to the property (or at least have disregard for upkeep);

2. The property likely hasn't been inhabited for months, or even years. Vacancy can take a major toll on a house, and there may have been issues caused by lack of occupancy.

- Just because an REO is priced $50K under market value (for example) doesn't mean that it requires $50K in repairs. It may require $5K in repairs or it may require $100K in repairs. Generally speaking, the price of an REO is not indicative of it's actual value, and isn't even related to its value until it's sold. The reason for this is that REOs have a much smaller market of buyers than a retail sale, so often these properties will sell for a price that is better -- even taking into account repairs -- then what you would expect given the repaired market value.

- Generally speaking, the worse condition the REO is in, the more discount off of market value it will sell for. An REO that needs $5K worth of work will generally sell for closer to market value than an REO that needs $100K worth of work, because the more work that's needed, the smaller the buyer pool.

All that said, when you buy an REO, you get much less information than you do when you buy through a retail transaction (generally speaking). So, you need to do more due diligence with your inspections and make fewer assumptions.