Have you ever wondered what the world of buying REO properties looks like from the inside? Don’t worry, you aren’t alone. It’s not uncommon for REOs to elicit more questions from newer investors than answers. In fact, there are very few new investors that are comfortable dealing in REOs from the moment their careers take off, but I digress. REOs don’t need to be as intimidating as some make them out to be. So long as you are willing to put in the work , REOs can open up a whole new world of opportunities. All you need to do is get the ball rolling.
Before setting off and buying REO properties, let’s first get to know a few of the basics. Below you will find some of the most frequently asked questions regarding REOs and their respective answers:
Question: Should an investor stay away from REO properties?
Answer: There are many reasons why a first-time real estate investor might avoid buying REO properties. You have to deal with a bank or lender, which may move at a glacial pace compared to a motivated seller. There’s also the risk of buying a property “as is” — with little or no time for inspection.
But this overlooks the fact that REO foreclosure properties represent a real opportunity for an investor. For one, there’s no marketing budget required, no Facebook ads or direct mail campaigns to run. You find a property and make an offer.
It’s also a far less emotional process than negotiating with a seller. As long as the numbers and parameters of a deal work for a lender (more on that below), there’s a lot less “persuading” involved.
Most importantly, if you focus on motivated lenders in your pursuit of buying REO properties, you can hopefully find an under-valued asset to add to your investing portfolio.
Your Questions About Buying REO Properties Answered
Question: What does “REO” mean?
Answer: Not a dumb question at all, especially if you plan to start dabbling into the REO foreclosure process as part of your overall real estate investing strategy.
REO stands for “real estate owned,” meaning a property in which the homeowners did not repay their mortgages and the bank or lender have foreclosed on the home and unsuccessfully tried to sell the home at auction.
And that’s where a lot of the confusion comes in: auction properties are not considered REO (yet). It’s only after a property has gone through auction, and failed to sell, that a bank takes possession and the home becomes a real estate owned property (which is where you, the investor, comes in).
Question: If an REO property doesn’t sell at auction, does that mean it’s a “dud?”
Answer: Not necessarily. There are many reasons why a property may not sell at an auction. Generally, the minimum bid price of a property at auction includes the unpaid loan balance, along with interest, lawyer’s fees and foreclosure costs. (This price can often be higher than market value.) There is also a myriad of other factors — such as seasonality, market conditions, cancelled or rescheduled auctions — that can affect the success of an auction.
Question: Where do you find REO properties?
Answer: There are two common methods for finding REO properties. One, is to simply scour the bank/lender REO listings to find potential properties. The Bank REO Real Estate blog has a resource list which provides links to many of the biggest financial institutions and their REO listings.
While this is an effective strategy, it is a time-consuming one. (Perhaps a job for a virtual assistant.) A better way is to leverage your existing real estate network, especially listing agents, to find out about REO properties before they hit the public access lists. Not only does this give you a leg up on the competition, but a listing agent will often have a relationship with a bank, and can help move a deal for a REO property closer to completion.
Question: How does buying an REO property work?
Answer: In learning how to buy a bank owned property, I recommend doing the following:
- Find a property – Through one of the methods outlined above.
- Perform an inspection (with a licensed inspector) – This may have to wait until after you make an offer. (If so, put in an inspection contingency.)
- Do a title search – Hire a title company to look for liens or outstanding taxes. You need to know this info. The liens remain in place until you pay them off as the new homeowner, regardless of whether you were the one who incurred the lien.
- Make an offer and negotiate – Even if you’re told a price is “firm,” remember you have a motivated seller in a lending institution. There’s always room to negotiate.
- Get financing in order – Yes, cash is king. (Whether through your own cash or private investor.) But there are ways to finance a property, especially a rental, with a lender. You can even, at times, use a home equity line of credit.
Question: Got any tips on closing REO deals?
Answer: The best tips for buying REO properties come down to understanding what the other party wants and making your offer as attractive as possible.
In this case, it’s important to think like a lender, who has most likely had this property on their books for quite some time and wants to get the highest recovery amount possible in the quickest time.
It’s all about speed, speed, speed. The more you can do to show you’re a serious buyer, who can take this property off their hands right away, the better your offer will potentially be received.
- Reducing your closing period – Forget the typical 30 days; go for something in the 10-20-day range to show you’re ready to do business, quickly.
- Decrease the inspection period – Give yourself 3-4 days for the inspection period, max. It might sound scary, but it will move your offer to the top of the list.
- Don’t make round number offers – Instead of $150,000, do $153,756. Coming in with a number slightly above a rounded number might just get your offer noticed by someone who counts.
- Focus on foreign and smaller banks – These institutions tend to be more motivated to sell than the huge banks. So spend most of your energy in this direction.
Putting It All Together
Buying REO properties isn’t the endless labyrinth many investors make it out to be. Though working with a bank or lender to acquire an REO property does require patience, and the ability to craft an offer that promises speed, there are genuine opportunities in this investing strategy.
As long as you do your due diligence and make your proposal as bullet-proof as possible, you’ll turn what many investors consider a no-win strategy into a win-win addition to your investor toolbox.