Think that an REO is a good deal?

It could be, but I don't recommend it as the best choice for a first-time buyer.

A "normal" sale–if you can find one in your price range–would be the best situation for a first-time buyer. (A "normal" sale is where the buyer purchases from the homeowner who can supply disclosures and background information on the house, and they negotiate terms through the escrow process.) That's really the safest way to not get in a project over your head. However, homes will have issues, so any home you purchase–no matter how good it looks–may have hidden flaws or things that break after escrow closes.

Most REOs are sold as-is and the bank will not negotiate any repairs. Often there are daily penalties if you do not close escrow on time. There are no disclosures to give you background information about the home's history or problems. It's definitely a "buyer beware" situation.

The bank may also require you to qualify with their choice of loan agent before they will accept an offer. Start out with a 740 score and qualify for 5 REO offers, when you finally get one you may no longer be an A-paper buyer.

Ultimately, if your purchasing power does not give you the option of shopping within the boundaries of a "normal" sale, spend time looking at various REOs before you jump into an offer. Consider the overall financial commitment you'll need to rehab the house. If a major component goes awry, you'll be stuck with a house you may not be able to live in if you don't have cash on hand for unexpected repairs.

You'll have two categories of REOs…..one that needs some cosmetic work (cleaning, paint, minor repairs)…..and the one that needs some serious renovations. It's pretty rare to find a move-in ready REO, unless the bank has already contracted out repairs to increase the value of the property.

Which category you pursue should be determined by time and resources. If you have cash to invest and want to flip the house, make sure you thoroughly inspect the home and consider the worst-case scenario when budgeting. Many REOs are "winterized," meaning the utilities are off and you may or may not be able to determine that the electrical, sewer, and water work properly before you buy. I wouldn't recommend shopping for this group of REOs unless you have trusted contractors lined up to work with you, spare funds in the budget, and a good agent who can price the home strategically and get it sold fast.

If you plan to purchase the REO to live in, a cosmetic fixer is a good fit. As long as the key items are there–cooking appliances, water, heat, electricity–you can move in and replace the carpet, update kitchen, and landscape the yard over the next two to five years. This strategy allows you to build equity over time via the do-it-yourself method. It's a good fit for people who have owned their own home in the past or are handy with home remodeling experience.

Writing your offer in a manner that appeals to the bank is important. Banks are not giving homes away or so desperate to unload them that they'll agree to ridiculous terms. A cash offer without a loan involved is a strong offer guaranteeing the bank a fast sale. A cash offer for less money than an offer contingent on a loan or repairs may still be more attractive overall.

Having toured about 20 vacant foreclosures in the past few weeks, here's a gambit of what to expect if you are considering a purchase:

1. Kitchen appliances: Usually anything that could be removed and sold is gone.

2. Winterized properties: Most have all the utilities shut off, so confirming that power, water, and sewer are operational is going to be a chore.

3. Floor coverings: About 9 out of 10 either have thrashed carpet or areas that are bare to the subfloor.

4. Partial remodeling in progress: Aside from the kitchen being appliance-free, many have missing cabinets, missing cabinet doors, missing countertops, mismatched cabinets. Baths can have any number of items removed…or maybe the toilet is in the living room.

5. Sheetrock damage

6. Broken doors: Usually the front door was forced for entry, often side doors or patio doors are boarded from the inside due to being forced. Trim is often missing from door frames.

7. Broken or missing windows

8. Nasty odors: One property had a bedroom that had been converted to a "dog room" complete with wall-to-wall carpet.

9. Landscaping: If you are fortunate to have anything left in the yard other than the prior resident's trash and furniture, it's likely weeds requiring a machete to get through.

10. Mold: If it's not the carpet, likely the bathtub has black grout.

What's the difference between a REO, foreclosure and short sale? I am going to start looking for a home to purchase and would like to know what to target.

An REO is a bank-owned home (Real Estate Owned), basically a foreclosed home. A short sale is still owned by a private party who is trying to sell the home with bank's approval to settle for less than the debt on the home.

Honestly, the best choice for a first-time buyer is a normal sale. The hype involved with getting a "great deal" on a foreclosure is a sales pitch. If you have a contractor in the family or cash to burn, rehabbing one of these REOs may be a good investment. But buying either a bank-owned property or a short sale often limits your ability to inspect the home and obtain background info. Furthermore, the bank will set the terms either way, usually it's as-is without any perks or negotiations in favor of the buyer.

Another item to consider is your lender's requirements. If you are buying with cash, no problem! If you are trying to go with FHA or other lender, many REOs will not qualify due to the poor condition they have been left in.

Look around and compare the overall condition of some foreclosures, short sales, and "normal" sales and make sure you're equipped to take on the possibilities involved before you decide to focus your search.

Another key item to consider on any new home purchase involves the floorplan. While it may work for your budget, ultimately the house needs to have a flow and appeal to the general market.

Moving kitchens and bathrooms are big ticket items, so if you don't like where the kitchen is — or if the guest bath is on the opposite side of the house from the guest bedrooms — likely the next owner won't like it either. Remodeling is a lot simpler if you incorporate it into the existing floorplan.

The current trend is open living space and master suites. Many older homes have a disjointed feel, like a kitchen at the opposite end of the house from the living/dining area.

Baths make a huge difference. A 3/2 is more marketable than a 3/1. That master suite/retreat concept allows parents their own bath they don't have to share with kids….a huge plus! Yes, you can add a full bath, but consider the cost to bring plumbing and sewer versus the purchase price. If you have a large half bath or walk-in closet backing up to the single bath, then you have a good possibility to add that second bath.