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When it comes to bank-owned properties—also called real-estate owned properties (REOs)—it seems that most investors have strong opinions about whether or not these investments are worth the time, money, effort and risk.

It’s important to remember that every property is unique. There’s no way to say for sure if an REO will be a good deal or a bad deal; it’s all about the amount of effort you put into familiarizing yourself with the property and the process of purchasing it from the bank.

Just like any property type, REOs certainly have their pros and cons. It’s up to you to distinguish the good deals from the duds. And, if you don’t feel prepared to do so, I hope I can shed some light on the topic today to help you make smart, informed decisions.

First, let’s take a quick look at how REOs work…

REOs are properties that the bank (or lien holder) obtains through a foreclosure sale (or, in some cases, through the deed in lieu foreclosure process). If the bank obtains the property through a foreclosure sale, this typically means that there weren’t enough bids at the foreclosure auction or the bids were not high enough for the bank.

In general, banks prefer to sell their properties to owner-occupants, if possible. Most will also prefer cash offers, and will require a higher down payment amount from investors. (Seems unfair, right?)

It’s also important to keep in mind that the bank is not trying to be your friend; they are trying to make the biggest profit possible. And even if you make a decent offer, banks are notorious for stalling—in an effort to elicit an even better offer from another interested buyer.

So, if I’ve officially scared you away from REOs, don’t stop reading here! There’s a lot more to be said about this property type. If you want to get a good idea of whether these houses are the right fit for your investing business, you need to see the whole picture.

The Good Stuff

There are some definite perks that you can benefit from when investing in REOs, such as:

  • ROI for REOs: While banks are looking for the highest offer possible, keep in mind that they are also highly motivated sellers who want the property taken off of their hands. In some cases, you’ll be able to score an amazing deal on an REO. Once you make any repairs/upgrades and you’re ready to sell or rent the property, you could be looking at some serious profit.
  • Crystal-Clear Title: In most cases, banks will take the necessary measures to clear the property of all liens and tax debts – before they put it up for sale. This means you’ll usually get a clear title when purchasing an REO. So, while the properties you might buy at auction are only wiped clean of junior liens, an REO is typically cleared of even government liens, local municipality liens and HOA liens. This eliminates a great deal of obstacles when you buy the property.
  • The Bank Does the Dirty Work: Before selling an REO, the bank will also take steps to vacate any occupants of the property. So, if there are some unruly homeowners (or even tenants) who are reluctant to leave without a fight, you won’t need to deal with it. By the time you own the property, it will be people-free, and you won’t have to worry about eviction measures.
  • No Emotional Strings Attached: Because the bank has no emotional attachment to the property (unlike most typical homeowners), nothing will really matter to them – as long as you have the financial means to give them the money they want (harsh but true). If the property has been on the market 30+ days, the bank will be especially motivated to see it go, as opposed to a traditional homeowner who may want to hold out for the “right” buyer to come along.
  • No More Sight-Unseen Purchases: As opposed to foreclosure sales (where you usually buy a property without ever seeing it in person), buying an REO gives you the opportunity to explore the house (inside and out) before you make any commitment. With time, you’ll be able to spot major issues that would cost big bucks to repair or replace – and you’ll know which properties simply aren’t worth it.
Of course, this is just scratching the surface of the benefits of purchasing REOs. But, in the interest of time, let’s move on to the other side…

The Bad Stuff

Every investing strategy has its ugly side. Here’s what to watch out for, if you choose to invest in REOs:

  • Mo’ Money: As I mentioned above, banks typically require a larger deposit (up to 5%) from investors, as opposed to owner-occupant bidders. And, in many cases, this earnest money is non-refundable. So, if the deal falls through for whatever reason, you could be saying goodbye to several grand.
  • Little Info to Work with: Many REOs have basically no historical financial information. The previous owner rarely leaves a cohesive group of financial statements to be reviewed; and even when they do leave some information, it’s often minimal at best. So, walking into a property with no historical data to go on, you’ll need to make a smart decision about whether or not it will be a good investment.
  • Banks. ‘Nuff Said: Banks are like an only child that has been spoiled their whole life. They are annoyingly devoted to getting their own way –  all the time. They are very seasoned negotiators, and they won’t settle for what they consider to be a subpar offer. In many cases, it might be difficult for you to figure out who the actual decision-maker is, and you shouldn’t be surprised if they push back on an offer that you thought they’d already accepted. In any case, it’s good to have a seasoned real estate attorney to help you through the contract phase. Don’t mess around with a bank on your own if you’re not 100% sure what you’re doing.
Now, for some investors, these “cons” will be minor issues that can be dealt with easily; if you’re a newbie or you’re still figuring out which property deals are the best fit for your business, these disadvantages could spell disaster for you.

Next Step: Finding REOs

If you want to explore the idea of investing in REOs even more, you might want to start searching for deals in your market.

Check out these strategies for finding REOs:

  • Online – Using sites such as RealtyTrac.com or even Zillow (use foreclosures as one of your search filters) offer a variety of REO listings; some of these services are free and others charge you a nominal fee.
  • MLS – If you have MLS access (or have a real estate agent who can send you listings), you can also search for local foreclosures this way.
  • Bank/lender Listings – Try going straight to the source. Larger banks will have REO listings on their websites; with smaller banks, you may need to contact your local branch and ask to speak with the person who manages REO property sales.
  • Partnering Up – Connecting with an agent who works specifically with REO properties in your area can be extremely helpful. Once the agent knows that you’re interested in REOs, you will be one of their first contacts when a new REO becomes available.
Once you get in the groove of things, you’ll find that spotting great REO deals is really simpler than you thought.

 

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Additional Strategies: When to Go the REO Route

When it comes down to it, assessing potential REO deals is like assessing any other property deal… you need to do your due diligence to determine if the payoff is worth any potential risk. Some REOs will be amazing deals and others will be the “avoid at all costs” types.

There are a few factors that—in general—may indicate a good REO deal. (Now, of course, these won’t apply to every single case; but they are good initial indicators to look into the property in more detail.)

First, if you find an REO that has been sitting on the MLS for a long time (30+ days), this could be a potentially awesome deal, because the bank is probably highly motivated to get rid of it. If you’re able to make a decent offer, you should have a shot at scoring the property.

Also, you might have good luck making offers on REOs that are located in markets or towns where there is a lot of real estate activity. Most traditional buyers won’t be interested in REOs if housing inventory is high in a specific area, which gives you the chance to be one of only a few interested parties (if not the only interested party).

Another thing to keep in mind: less experienced investors will probably be unlikely to put in offers on REOs (especially those that are priced high), because the amount of money required upfront is probably not do-able for them…

So, if you have adequate cash and some experience with REOs, you will usually have less competition when bidding on a higher-priced REO.

Rock ‘n’ REO’ll

If you’re ready to start pursuing REO deals, make sure you take ALL of these factors into consideration.

You can gain some very impressive assets, if you handle these transactions wisely.

Just be prepared:

  • to put down more money upfront
  • understand that you need to move at the bank’s pace (whether that be fast or slow)
  • have a reliable and trustworthy attorney to help you through the negotiations and contract phase
REOs can be a lot of work – that’s for sure – but you reap what you sow. By selling the property later or renting it out for years to come, you’ll see the financial benefits of your efforts.

Getting Started

If you’ve purchased an REO, what has been your experience? If you’re still on the fence, what questions or concerns are holding you back?

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