Loading page
Loading page
You’re probably looking to purchase a property at auction only to discover that the property is REO ("Real Estate Owned") Occupied. Well, what does that mean?
An REO occupied property is a home that is owned by a lender while still being occupied. The individual residing within the home could be the previous owner, a tenant, or even a squatter. The lender is typically a bank but could also be a government agency or government loan issuer.
This situation can occur when a bank forecloses upon a home while there’s still a tenant within the home. Typically, the REO management company (hired by the bank) will offer the tenant cash-for-keys prior to its auction so that the property can be sold as vacant. Sometimes the tenant may vacate the property without any incentive whatsoever by the time the property is foreclosed. This means that an REO occupied situation occurs when the lender is unable or unwilling to remove occupants prior to an auction.
One of the risks of buying an REO occupied property is that you cannot view the interior of the properties prior to purchasing them. They are typically sold “as-is” without any contingencies or inspections and will ask you not to disturb the residents. The seller will also make it clear that the buyer is responsible for obtaining possession after a sale.
Any investor should keep in mind that an occupied property inherently carries more risk compared to a vacated property. You cannot control what the tenants do prior to purchasing the home and there absolutely have been worst-case situations of tenants maliciously destroying a home on their way out.
Savvy investors anticipate the worst in REO occupied situations and adjust their budget accordingly. Some investors will be only willing to purchase an occupied home for land value and consider themselves lucky if the interior is salvageable. Newer investors are discouraged from jumping into properties that are occupied given the present risks.
Even though REO occupied auctions are a bit riskier, there are some ways that an investor can still make a killing on them.
Here’s a tip: knock on the current tenant’s door and offer $20 if you can take a quick look around. Many other investors may likewise make this offer, so it’s best to reach out as early as possible before the tenant become inundated with requests. The information gained from a quick walkthrough could be invaluable during the bidding process. Additionally, if they seem to take care of the property you may want to keep them on as tenants after the sale!
Some people take the previous tip a bit further and will pay the tenants a larger amount of money if they will allow an inspector to examine the property. An inspector’s report that only you have access to would be invaluable during an auction.
Talking (or maybe even gossiping) with neighbors may also yield a lot of valuable information. Also, check to see if it was previously listed on the MLS. Photos of when the home was last listed may provide clues as to its quality and the previous listing agent may be willing to provide you with some information.
Once you assume title, it’s best to approach the current tenants from the perspective of an advocate rather than an enemy. Try to meet with them to determine their financial situation and see if they are open to receiving cash to move out or potentially staying on as a tenant. Make it clear that you’re just a third party caught up in this mess; it’s the bank that created this situated.
Starting a dialogue in this manner will be more productive than immediately taking an adversarial position. As the old adage says, you'll have more success with honey rather than vinegar. However, you may ultimately run into a situation where you are left with no other options but eviction.
Things get a little bit more complicated if you wind up purchasing a bank-owned property when the tenant has a lease. It’s usually much easier to evict a holdover homeowner rather than a tenant with a signed lease.
A tenant that is still residing within a property after foreclosure may be protected under the Protecting Tenants at Foreclosure Act. Keep in mind that these protections apply only for tenants who have a “bona fide” lease, not for squatters. Under the Act, you can only terminate the lease in the event that you:
This legislation only behaves as the bare minimum within the United States; many individual states have enacted significantly more tenant-friendly legislation. For example, it can take months to evict someone in states like California or Minnesota. In other states, you may still be obligated to uphold the tenant’s current lease. It’s best to contact a real estate lawyer in order to determine your options.
So, is buying an REO Occupied property worth it? Well, it depends.
REO occupied properties are typically cheaper given the fact that the buyer is responsible for removing the tenant. A savvy investor may also be able to get some “insider information” on the quality of an occupied home’s interior through bribing the occupant or detective work. You may be able to use the fact that the home is occupied to your advantage!
Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.