When bidding at the auction, you compete against the lender and other investors. This is the only investing method where you can really hit the jackpot. Auctions are frequently postponed, wasting your time and effort. It is rarely possible to inspect the property. To be safe, you should have a title search performed, which can be costly.
Improper research can lead to devastating results.
An REO occurs when the lender takes back the property to gain possession and cut its losses. The lender, however, does not want the property because it is not in the real estate business and is therefore usually motivated to move the property quickly. The lender is almost always the senior lien holder, thereby wiping out all other liens at the auction. This means an REO will always have clear title, which saves a lot of time, expense and worries when buying foreclosures. Most likely, the lender will also have paid any property taxes in arrears.