Bank REO properties are extremely sought after in the real estate investment circles. In very simple terms, REO, or Real Estate Owned, is property that failed to sell at a foreclosure auction and whose ownership, therefore, got transferred back to the lender/mortgage company. A large number of foreclosure auctions are unsuccessful with no bids at all since there is apprehension about the equity. The minimum bid includes the loan balance, accrued interest, attorney's fees and other costs. A cashier's check for the full amount of the bid is mandatory for participating in the auction. The successful bidder receives the property in "as is" condition and has to take care of all aspects including other liens against the property. Since the property's worth is almost always less than what is owed to the lender, foreclosure auctions usually fail and the property's ownership gets transferred to the lender, and it becomes a part of the REO properties in the lender's books.
In case, the lender is a bank, the property gets the name "Bank REO". The mortgage loan no longer exists and the ownership of the property rests with the bank. Since banks are more well-versed and adept at handling financial transactions rather than the managing real estate portfolios, they have specialized departments who work closely with licensed REO property agents to manage and convert their REO properties into cash. There are thousands of bank owned houses in California in the present economic downturn and these are listed for sale with various REO property agents. REO is a nightmare for the bank - it has to handle the eviction, do some imminent repairs, negotiate with the IRS for removal of tax liens etc. Plus, it is NPA (Non Performing Asset) for the bank - bank REO properties block funds and do not fit very well its core business and revenue generation model. Though there is surely a pressure to convert REO properties to cash, lenders or banks aim to get the best price possible and hence, it is wrong to assume that bank REO properties are generally cheaper. Fairly detailed groundwork, in terms of valuation and future prospects, is recommended for anyone keen on buying bank owned houses in California.
Usually a counter-offer is made by the banks against the offer made by interested buyer - this may just be a futile effort to get a higher price and should be countered if reasonable research and valuation has been performed. Review and approval of the offer/counter-offer takes time and is subject to final corporate approval. A pre-approval letter for loan can make your offer easy to accept. Most Bank REO properties are usually sold in 'as is" condition with no repairs etc. However, inspections can be made and sometimes, the bank may offer to have the repairs done or provide a credit for the same. Hence, it is a good idea to have your real estate agent contact the listing agent for clarifications in this regard.