Wholesaling Bank-Owned REO Properties
REO properties (Real Estate Owned) are homes that banks have taken back through foreclosure. The bank is now the owner and is typically motivated to sell because they are not in the business of owning real estate. They want these assets off their books. For wholesalers, REO properties present both opportunities and challenges that differ significantly from dealing with individual homeowners.
Why banks sell REO at a discount
Banks are not real estate investors. Every REO property on their books is a non-performing asset that requires maintenance, insurance, property tax payments, and management overhead. Regulatory agencies (FDIC, OCC) also pressure banks to reduce their REO portfolios within specific timelines. This creates institutional motivation to sell, even at below-market prices.
Additionally, many REO properties have been vacant for months or years during the foreclosure process. They may have been vandalized, stripped of appliances and fixtures, or damaged by weather and neglect. The bank's carrying costs are mounting while the property's condition deteriorates. A cash offer that closes quickly eliminates these ongoing costs, which is why banks accept below-retail offers.
How REO sales work
REO sales follow a different process than traditional home sales. Understanding this process is essential for structuring wholesale deals:
The listing phase
Banks typically list REO properties through their designated listing agents or asset management companies. These agents specialize in REO sales and follow the bank's specific protocols for marketing, showing, and accepting offers. Properties are often listed on the MLS, bank-owned property websites (like HomePath for Fannie Mae), and auction platforms.
The offer process
Offers on REO properties are submitted to the listing agent who forwards them to the asset manager at the bank. The asset manager reviews offers based on net proceeds to the bank (offer price minus buyer credits, commissions, and closing cost concessions). The bank may counter your offer, accept it, or reject it outright. Response times range from 24 hours to 2 weeks depending on the bank.
Bank addendums
Banks use their own purchase addendums that supplement or override the standard real estate contract. These addendums typically include as-is clauses, shortened inspection periods, specific earnest money requirements, and restrictions on assignment. Read every bank addendum carefully before signing.
Most bank addendums prohibit assignment. This is the biggest challenge for wholesalers. Banks typically include language that prevents the buyer from assigning the contract to a third party. Your primary strategy for REO deals is a double close, not an assignment.
Double close strategy for REO
Since assignment is usually prohibited, you need to close on the property yourself (A-to-B transaction) and immediately resell to your investor buyer (B-to-C transaction). This requires:
- Transactional funding: Short-term loans specifically designed for double closes. The lender provides 100% of the purchase price for 1-3 days. Fees are typically 1-2% of the transaction amount. See our transactional funding guide for details.
- Title company cooperation: Not all title companies will handle double closes. You need an investor-friendly title company that is comfortable with back-to-back closings on the same day.
- Buyer lined up before closing: You need your end buyer committed before you close on the REO. If you close without a buyer, you own the property and the carrying costs that come with it.
Finding REO deals
- MLS searches: Filter for bank-owned, REO, or corporate-owned listings in the MLS. These are often flagged in the listing description or ownership type field.
- Bank-owned property portals: Fannie Mae (HomePath), Freddie Mac (HomeSteps), HUD (HUDHomeStore), and individual banks maintain REO property listings on their websites.
- Auction platforms: Auction.com, Hubzu, and Xome list bulk and individual REO properties for sale. Some allow pre-auction offers.
- Asset managers: Building relationships with asset managers at local and regional banks gives you access to REO inventory before it hits the public market. These relationships are valuable but take time to develop.
- REO listing agents: Agents who specialize in REO sales control the deal flow. Getting on their buyer list means early notification of new REO listings. Offer to buy multiple properties and close quickly to become a preferred buyer.
Pricing REO deals
Banks price REO properties based on Broker Price Opinions (BPOs) and appraisals. The BPO is conducted by a local real estate agent who estimates the property's current market value. Banks typically price their REO listings at or near the BPO value, then reduce the price every 30-60 days if the property does not sell.
Your offer strategy depends on where the property is in its listing lifecycle:
- Newly listed (0-30 days): The bank expects full-price offers. Your chances of getting a deep discount are low unless the BPO was inflated.
- Seasoned listing (60-120 days): The bank has reduced the price at least once and is becoming more flexible. This is the sweet spot for offers.
- Stale listing (120+ days): The bank is eager to sell. Your most aggressive offers have the best chance of acceptance on listings that have been sitting for months.
Run your own comp analysis and repair estimate to determine the ARV and rehab cost. Then price your offer to leave room for your assignment fee and your buyer's profit margin while still being attractive enough for the bank to accept.
Earnest money and proof of funds
Banks have strict earnest money requirements for REO offers. Typically $1,000-$5,000, deposited within 24-48 hours of acceptance. Some banks require a specific percentage of the purchase price (1-3%).
You also need proof of funds to submit with your offer. Banks want to see that you can actually close. Your proof of funds can come from your own accounts, your transactional funding lender, or a hard money lender who has pre-approved financing for the purchase.
Marketing REO deals to your buyers
Your marketing package for an REO double-close deal should be straightforward:
- Property photos (interior and exterior)
- Repair estimate broken down by category
- ARV comps for renovated properties in the area
- Your asking price and the projected buyer profit
- Closing timeline (the B-to-C close needs to happen within 1-3 days of the A-to-B close)
- Title status (REO properties typically have clear title since the bank went through foreclosure)
Target experienced cash buyers who can close quickly. The double-close timeline is tight, and your buyer needs to be ready to wire funds within days of your initial closing.
Advantages of REO deals
- Clear title: The foreclosure process wipes out most junior liens. REO properties typically have cleaner title than other distressed properties.
- No emotional seller: You are dealing with a corporation, not a person. Negotiations are purely numbers-based.
- Predictable process: Banks follow standard procedures. Once you learn the process, deals are repeatable.
- Volume potential: One bank relationship can produce dozens of deals per year.
Disadvantages and risks
- No assignment: Double closes are more expensive and logistically complex than assignments.
- Competition: REO deals are publicly listed, which means you are competing with retail buyers and other investors.
- Slow response times: Banks can take weeks to respond to offers, which creates uncertainty in your pipeline.
- Strict terms: Bank addendums often favor the bank with short inspection periods, as-is conditions, and limited contingencies.
- Earnest money at risk: If your buyer falls through and you cannot close the A-to-B transaction, you lose your earnest money.
Related articles
- Wholesaling Pre-Foreclosure Properties
- How to Wholesale Foreclosures
- HUD Home Investing Strategies
- Double Close Funding Options