Investing in bank owned homes has become synonymous with today’s greatest real estate strategies. Otherwise known as REO (real estate owned) properties, bank owned properties are just that: homes that are currently “on the books” of banks or traditional lending institutions. It is worth noting, however, that most banks would rather not hold on to any properties (especially those that have been deemed non-performing assets). Instead, they would rather sell them to the next buyer, which — if you play your cards right — could be you.

What Are REO Properties?

REO properties are the homes that have been repossessed from borrowers that were unable to keep up with mortgage obligations. In other words, when a homeowner falls behind on mortgage payments, they become subject to foreclosure. To be clear, foreclosure is an action; one lenders take when repossessing a mortgaged property from a homeowner that has failed to keep up with contractual mortgage payments, but I digress. Bank owned homes are not foreclosures; they are the properties that go through the foreclosure process but fail to sell at auction. While there are only subtle differences, they are important differences, nonetheless.

Once the bank takes a property through foreclosure, it then tries to recoup losses at auction. You see, banks lose money when their borrowers can’t pay their loans, so they must make up for the missing revenue by selling the property at auction. In selling the home at auction, banks may be able to recoup a good portion of the amount they were owed by the original borrower. However, there are many reasons homes may not sell at auction, and it’s those homes that become the topic of today’s discussion.

REO properties are those homes that have been foreclosed on, repossessed by the original lender, put up for auction by the lender, and subsequently failed to sell to a new buyer. In other words, bank owned homes are bank owned because they can’t get rid of them. That’s why they are called bank owned homes; the bank literally owns them.

It is important to note the banks intentions, however. While the original lender may have repossessed the property in an attempt to recoup losses, they certainly have no intention of holding on to said property. Banks are in the business of lending money and collecting interest; it’s a great business model that has done them well for quite some time. That said, banks are not in the business of holding on to properties, especially if they aren’t “performing.” When a bank repossess a home, it is more of a burden than an asset; it is essentially a drain on their bottom line because it’s simultaneously costing money and not bringing in any revenue.

Banks call them nonperforming assets because they are exactly that: assets with potential that aren’t being exercised. Therefore, banks would rather remove said properties from their books, and that’s where savvy investors come in. If you play your cards right, you might be able to acquire a good deal from a motivated bank and create what many like to call a win-win.

Investing In Bank Owned Homes

Investing in bank owned homes, not unlike every other acquisition strategy you are probably familiar with, has more to do with the owner’s motivation than anything else. You see, investing in real estate has one fundamental principle: buy low and sell high.