By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.
REO due diligence means finding out yourself what an ordinary seller would have told you: the home’s condition, permit history, title issues, occupancy and hazards. California lenders selling homes they took back through foreclosure don’t have to provide the Transfer Disclosure Statement, so the inspection period does the work disclosures normally do. Use the checklist below from the day your offer is accepted, and keep an eye on the bank’s deadlines, which are usually shorter than a normal contract’s.
Before you write the offer
- Read the bank’s addenda in advance if the listing agent will share them. Note the inspection period, any per-day fee for a late closing and what the bank won’t do, such as repairs, permits or utility work.
- Check public records: assessor data (square footage, bedrooms, year built), permit history with the city or county, and recorded documents.
- Look at the hazard maps for fire, flood and earthquake zones, because you may not get a disclosure report.
- Get a contractor’s ballpark for obvious work you can see in photos or from the street, so the offer price reflects it.
Disclosures you won’t get, and what replaces them
Under Civil Code §1102.2, the Transfer Disclosure Statement doesn’t apply to sales by a lender that acquired the home at a foreclosure sale or by deed in lieu, and Civil Code §1103.1 likewise exempts those sales from the natural hazard disclosure statute. Other disclosure rules can still apply, and agents have their own duties to disclose what they know. In practice:
- Order your own natural hazard disclosure report through escrow or a disclosure company.
- Ask the listing agent for anything the bank knows: prior inspection reports, utility shut-off notes, code violation notices, HOA documents.
- Assume the bank knows little about the home’s history, because it never lived there.
Condition: the inspections to order
| Inspection | Why it matters on an REO |
|---|---|
| General home inspection | The baseline; flags issues for the specialists below |
| Termite and dry rot (wood-destroying pest) | Vacant homes often have unaddressed moisture and pest damage |
| Roof | Deferred maintenance and leaks are common after a long vacancy |
| Sewer lateral camera | Root intrusion and breaks; some cities require lateral work at sale |
| Septic system and well, if rural | Tanks may not have been pumped, pumps may have failed, water may need testing |
| Plumbing pressure test | Winterized homes can have pipe damage that only shows when the water is on |
| Electrical and HVAC | Stripped wiring, missing equipment or unpermitted panels |
| Mold | Leaks plus a closed-up house is a common recipe |
| Foundation or structural engineer | If the general inspector sees cracking, sloping or drainage problems |
Utilities are often off. Ask the listing agent early to have gas, water and power turned on for inspections, and expect the bank to require a licensed contractor for de-winterizing and re-winterizing.
Permits and code compliance
Compare the home with its permit history. Garage conversions, added bedrooms and decks built without permits are common, and the bank won’t legalize them. Check for open code-enforcement cases, which can carry fines that follow the property. If the home is in a city with point-of-sale requirements, such as sewer lateral or smoke and carbon monoxide detector rules, find out who pays. Usually that’s you on an REO.
Title and liens
Read the preliminary title report as soon as escrow opens. On an REO, you’re looking for:
- That the bank’s trustee’s deed was recorded and the foreclosure appears complete
- Liens the foreclosure didn’t wipe out, such as property taxes, some municipal liens, HOA assessments and any senior lien if the foreclosing loan was a junior one
- Code-enforcement or nuisance-abatement liens
- That the title insurer will issue a policy; some exclude matters related to the foreclosure, and those exceptions are worth discussing with escrow and your agent
Occupancy
Confirm the home is vacant, and get the bank to state who handles any remaining occupants. If there are tenants, California law protects them: month-to-month tenants are entitled to 90 days’ written notice after a foreclosure, and a fixed-term lease signed before the sale can often run to its end unless the new owner will live in the home or another exception applies (Code of Civil Procedure §1161b). Local just-cause rules can add more. Buying an occupied REO isn’t unusual for investors, but price the time and cost of possession into the offer.
Vacant-home risks
Empty homes deteriorate. California makes the owner of a vacant foreclosed home responsible for its exterior, with fines of up to $2,000 a day after notice and up to $5,000 a day after 30 days (Civil Code §2929.3), so the bank should have kept up the outside, but that says nothing about the inside. Look for theft of copper and appliances, squatting, broken windows and water damage. Our guide to REO property preservation explains what lenders are supposed to do while they own the home.
Insurance, fire and HOA
- Insurance: get a quote before you remove contingencies. A home that’s been vacant, or that needs a new roof, can be hard to insure, and coverage in higher fire hazard zones has become harder to find.
- HOA: request the HOA documents, budget and any past-due assessments. Unpaid assessments from the foreclosure period may be the bank’s responsibility; confirm in escrow.
Financing checks
If you’re borrowing, your lender’s appraiser will judge the home’s condition. FHA and many conventional loans won’t fund a home with missing systems, safety hazards or major damage. If the inspections find those, a renovation loan or cash may be the only route. See financing a bank-owned home.
Deciding what to do with the results
With the reports in hand, you have three choices: proceed, ask for a price reduction or credit, or cancel within the contingency period. Banks rarely make repairs but sometimes reduce the price when an inspection finds a significant problem the listing didn’t reflect. Put requests in writing with the supporting report, and stay within the bank’s deadlines.
Questions buyers ask
Can I inspect a bank-owned home before making an offer?
Usually you can view it, and sometimes inspect it, but most inspections happen in the contingency period after acceptance.
Will the bank fix anything the inspector finds?
Rarely. Price the repairs into your offer and use any significant new findings to negotiate a reduction.
Who pays to turn the utilities on?
It varies by bank. Ask the listing agent before you schedule inspections.
Is title insurance available on an REO?
Usually, yes. Review the preliminary report and any foreclosure-related exceptions with your escrow officer.
Buying a bank-owned home? Start with our guide for REO and short sale buyers or contact us. If you’re still deciding what to buy, compare REOs and short sales or read how HUD home purchases work.
Sources & notes
This checklist is general guidance, not legal or inspection advice. Last reviewed October 2026 by Matthew Martinez.
