What Is a Bank-Owned Property?

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DEFINITION
Bank-owned property is property owned by a bank rather than a homeowner.

Bank-owned property is property owned by a bank rather than a homeowner. A property can become bank-owned if the original homeowner defaults on the mortgage and the home falls into foreclosure.

Bank-owned properties can be attractive options for homebuyers and real estate investors because they often sell at discounts. There are some trade-offs you might make, however, when buying a bank-owned home as a primary residence or as an investment property.

Let’s learn more about what a bank-owned property is, and the pros and cons of buying one.

Definition and Example of Bank-Owned Property

A bank-owned property is a property that's gone through the foreclosure process and is now under the ownership of the bank. Banks can also assume ownership of a property through a deed in lieu of foreclosure. This type of property is also referred to as real estate owned (REO).

Once a bank assumes ownership of a property, it can list that property for sale. Homebuyers or real estate investors can purchase bank-owned property, often at a discount if the home needs major repairs or improvements to make it livable.

  • Alternate name: real estate owned property
  • Acronym: REO

There are different circumstances under which a property might become bank-owned. For example, say you get a promotion at work so you decide you'd like to buy a $400,000 home. A year later, you lose your job and can no longer afford your mortgage payments. You default on the mortgage, which eventually falls into foreclosure, after which, the home's ownership reverts to the bank.

Bank-owned property is not the same as custodial property, which is property that is borrower-owned but has been abandoned.

How Bank-Owned Property Works

Before a property can become bank-owned, it first has to go through the foreclosure process. Foreclosure guidelines vary from state to state but generally, lenders can pursue this option when a homeowner fails to make their mortgage payments. Depending on the state, the lender may need to file a lawsuit to reclaim the property, which is known as judicial foreclosure.

As part of the foreclosure process, the bank will attempt to sell the property through a public auction. If the property sells, this allows the bank to recoup some of the financial loss associated with the foreclosure. If the property does not sell at auction, then the bank assumes ownership of it.

At this point, the bank still has an interest in getting back some of its investment so they can list the home for sale. The amount the property is listed for can depend on its condition and how much money the bank is out for the unpaid mortgage. In many cases, bank-owned properties can be purchased at a discount since the bank is eager to get rid of these liabilities.

Real estate owned foreclosure sales may attract homebuyers and/or real estate investors who are looking to purchase properties at discounts. For example, you might be looking to buy a fixer-upper property that you can rent out for passive income. So you scour local bank-owned property listings and find a home that's selling for $100,000 less than typical comps in your area.

From this point on, buying a bank-owned home is similar to purchasing any other property. You'd need to find a lender who will approve you for a mortgage, unless you plan to pay cash. You'd also need to get the home appraised and inspected, and complete a title search to ensure there are no outstanding liens or claims against the property.

Getting preapproved for a mortgage through the same bank that owns the property could help speed up the purchase timeline.

What To Consider With a Bank-Owned Property

Bank-owned properties can be attractive for real estate investors who are interested in buying bargains and turning them into cash-flow assets.

In terms of where to find them, try a site such as RealtyTrac, check with your local tax office, or contact banks directly to see if they have any properties to sell. You can also search auctions for homes with government-backed loans through one of these agencies:

  • Fannie Mae
  • Department of Housing and Urban Development
  • Federal Deposit Insurance Corporation
  • Department of Agriculture
  • Department of Veterans Affairs

There are a few things to keep in mind, however, when considering this investment option.

It's important to look beyond the initial purchase price to consider how much additional investment is needed to make the home livable and rentable.

The bank may make some small cosmetic upgrades or improvements so the property looks more attractive to buyers—but there may be larger issues or repairs you'll need to handle.

This is why an appraisal and an inspection are critical when purchasing a bank-owned property, whether you plan to rent it out or live in it yourself. You don't want to purchase a real estate owned property, only to learn after the fact that you'll need to spend $25,000 replacing the roof and $10,000 replacing the HVAC system.

Considering the numbers beforehand can help you to determine whether buying a bank-owned property is a good investment, and how much of a return you're likely to see on that investment if you plan to rent the property or flip it to another buyer. Also, keep in mind that unlike buying a regular home, bank-owned properties may offer less room for negotiation. The bank may be less incentivized to make concessions if there are a number of prospective buyers.

Consider consulting a real estate attorney or other property expert to review the terms of your contract before signing off on the purchase of a bank-owned property.

Key Takeaways

  • Bank-owned property is property that has gone through the foreclosure process and is owned by a bank rather than the original borrower.
  • Bank-owned property or real estate owned property (REO) can be an attractive option for homebuyers or real estate investors who want to buy homes at discounts.
  • Properties owned by the bank may attract more competition from other buyers if the homes are selling well below market value.
  • Before buying a bank-owned property, it's important to understand the investment involved and the potential risks and return on that investment.

Article Sources

  1. U.S. Department of Agriculture. “What Are Real Estate Owned Properties?” Accessed Jan. 27, 2022.

  2. Consumer Financial Protection Bureau. “How Does Foreclosure Work?” Accessed Jan. 27, 2022.

  3. Bank of America. “How To Buy a Foreclosed Home.” Accessed Jan. 27, 2022.

  4. U.S. Government Information Services. “Auctions and Sales.” Accessed Jan. 27, 2022.