Stuart McFarland is a man with 14,000 homes on his hands, cut-rate mortgage money to lend and a special message for first-time and move-up real estate buyers: Before signing up for anything, check out your local REO. You may well end up with a better house, lower price and cheaper mortgage financing, including no-money-down at two points below market.

REO? It's financial-industry jargon for "real estate owned." It means property that lenders have on their books for the wrong reason: houses they've taken back through foreclosures against defaulting mortgage borrowers. An estimated $14 billion worth is currently in lenders' portfolios, much of it sprinkled in moderate- to upper-income suburban neighborhoods and in good physical shape. Yet only a fraction of it is being marketed aggressively by the lenders who own it. The rest just sits, rented or empty.

"They {the lenders} know they have to sell it," says McFarland. "They know that holding on to a house costs them money. They just don't actively go after buyers or even brokers."

McFarland should know. He is the nation's reigning REO guru. By virtue of overseeing, managing and needing to dispose of more than 14,000 single-family homes spread across 31 states, McFarland has more REOs to worry about than anyone except the federal government, whose Federal Housing Administration and Veterans Administration outrank him.

McFarland's Falls Church firm, Skyline Cos., catapulted to the top of the REO heap when it took over the huge, bankrupt Equity Programs Investment Corp. real-estate syndication firm. Epic had created investor partnerships that owned more than 20,000 single-family houses nationwide at its peak, primarily builder-model homes in subdivisions.

Working on behalf of Epic's creditors, Skyline wants to quickly dispose of the remaining 14,000 homes in the portfolio, on the best terms it can arrange. The houses span the gamut from bare-bones condos in the $50,000 range to sprawling $450,000 semicustom estates. They are in most regions of the country, with sizable concentrations in Texas, Colorado, California, Florida, Oklahoma, Arizona, Louisiana, Maryland and New Jersey.

Ninety percent of the homes currently are rented to tenants on short-term leases. Although Skyline will sell the units in "bulk packages" to investors, McFarland wants to offer most of the homes to single-family purchasers seeking a dwelling. The buyers who will benefit most, he believes, will be either first-timers who can make maximum use of a low down payment and discount financing, or move-up buyers and people moving from other cities who can come away with more house for their money.

What kind of deal can you cut? McFarland says it will depend on the individual house and the degree of softness of the local market. The tougher the market, the better the deal. Buyers can expect to come away with houses at somewhat less than their current appraised market value, which may be far below the price they sold for two to five years ago. If you're dealing direct, your cost should also reflect a commission-free price, since no broker was involved.

Buyers can also plan on below-market financing. Skyline has its own mortgage-banking subsidiary, and will custom-tailor cut-rate, adjustable and single-digit, and 30-year fixed-rate loans to fit purchasers' qualifications. Although McFarland doesn't want to promise "nothing-down" financing for buyers, he confirms that it is available on a case-by-case basis.

McFarland's advice on REOs goes well beyond Skyline's portfolio. A former executive vice president and chief financial officer of the Federal National Mortgage Association, which buys mortgages on the secondary market, he believes American home buyers have been missing tremendous potential bargains by not ringing lenders' doorbells about REO opportunities. Here's what he suggests: Cold calls to local mortgage lenders, particularly savings and loans, can turn up surprisingly good deals. Ask to talk to the person in charge of REOs, if the institution has a portfolio of foreclosed properties.

Be reasonable. Don't expect a lender to hand you the keys to a house at a fire-sale price. Your objective should be to land a marginally below-market price with significantly below-market financing terms. That's plenty.

Check out the other REO sources open to you, including local offices of Fannie Mae, the Federal Home Loan Mortgage Corp., FHA and VA. Each has a stock of financially distressed properties on the block or being readied for sale.