Why Inspections Matter More on REO Properties
In a traditional home sale, the seller discloses known defects and often makes repairs before closing. In an REO sale, the bank typically has no direct knowledge of the property's condition — they've never lived there — and they won't make repairs. The inspection is your primary tool for uncovering problems and accurately estimating your total cost of ownership.
Never waive an inspection on a bank-owned property, even in competitive markets.
General Home Inspection
Start with a comprehensive inspection by a licensed home inspector. This covers the major systems and components of the home. Ask your inspector to specifically note:
- Roof condition — age, missing shingles, flashing problems, evidence of leaks
- Foundation — cracks, settling, signs of water intrusion
- Exterior walls, siding, and trim — rot, damage, gaps
- Windows and doors — broken seals, missing hardware, security concerns
- Attic — insulation, ventilation, evidence of pests or water damage
- Basement or crawl space — moisture, structural concerns, mold
Plumbing Systems
Vacant properties are at high risk for plumbing problems. Pipes can freeze and burst, and water damage may have gone undetected for months. Check:
- Water pressure and flow at all fixtures
- Evidence of leaks under sinks and around toilets
- Condition of the water heater (age and function)
- Sewer line condition — consider a camera inspection for older homes
- Any evidence of pipes having been winterized or damaged by freezing
Electrical Systems
Outdated or damaged wiring is a safety and insurability concern. Your inspector should evaluate:
- Age and type of the electrical panel (watch for recalled brands like Federal Pacific)
- Functioning outlets and GFCI protection in kitchens and bathrooms
- Evidence of DIY or unpermitted wiring work
- Presence of knob-and-tube or aluminum wiring in older homes
HVAC Systems
Heating and cooling systems are expensive to replace. Assess:
- Age and operating condition of the furnace and air conditioning unit
- Condition of ductwork and filters
- Evidence of proper maintenance history (if any records are available)
- Fireplace and chimney condition if applicable
Specialized Inspections to Consider
Beyond the general inspection, REO properties often warrant additional specialist evaluations:
| Inspection Type | When to Prioritize It |
|---|---|
| Mold inspection | Any signs of water damage, musty odors, or visible discoloration |
| Pest/termite inspection | Wood structures in humid climates or evidence of insect activity |
| Radon testing | Homes with basements, especially in high-radon geographic areas |
| Asbestos testing | Homes built before 1980 — insulation, floor tiles, and pipe wrap may contain it |
| Lead paint testing | Homes built before 1978 |
| Sewer scope | Older homes or any signs of drainage issues |
| Structural engineer | Visible foundation cracks or significant settling |
Title Search and Lien Check
Inspections cover the physical property, but due diligence also means verifying the legal status of the title. Even though REO properties generally come with a clear title (the bank resolves most liens during the foreclosure process), you should:
- Order a title search through a title company or real estate attorney
- Confirm there are no remaining HOA liens, tax liens, or mechanic's liens
- Purchase owner's title insurance at closing
Using Inspection Results
Remember: on an REO sale, the bank is unlikely to make repairs based on inspection findings. However, if the inspection reveals major issues, you may have grounds to walk away and receive your earnest money back (depending on your contract terms), or you can factor repair costs into your offer price from the start.
The inspection is your clearest window into what you're buying. Use it fully.