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"Foreclosure Investing is Much Safer with REO Properties"


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A strategy focused on bank owned real estate, or REO properties, is definitely something to look into. Yes, it's difficult to find an absolute steal (but NOT impossible!). That said, REO properties can often be acquired at below-market prices.


WHAT IS AN REO?


A Real Estate Owned property is any foreclosure that reverts back to the lending bank after failing to get sold at a foreclosure auction. In fact, this is usually where foreclosures end up because many times no auction bids are received.

Why? Because the lending banks always set the minimum bid at the amount due on the mortgage financing (plus auction costs, real estate attorney fees, accrued interest, etc.). Since foreclosures typically do not have much (if any) equity built up in them, this minimum threshold is often too high to represent a good deal.

After the failed auction attempt, the property becomes bank owned real estate and the mortgage ceases to exist.


HOW REO PROPERTIES ARE SOLD


With any reverted property, the bank will typically do the following:

  • Serve an eviction notice to any occupants
  • Secure the premises
  • Attempt to remove real property taxes and title liens
  • Pay off any deferred expenses (association dues, sewer expenses, etc.)
  • Make some repairs as needed
  • List the property for sale, usually via a real estate agent

The bank will strive to do these things ASAP so they can recoup expenses and get the properties off their books. Many banks have entire departments that are solely focused on managing their Real Estate Owned inventory.

There are 3 primary ways to find bank real estate for sale:

I would recommend using your agent, at least in the beginning. That's the only method I've ever used to buy bank real estate, and it has worked for me!




BUYING PROCESS FOR BANK OWNED PROPERTIES


Assuming you'll use your agent to locate Real Estate Owned properties, the buying process is pretty much the same as it is for any property type. The bank will appoint a real estate agent to list & sell the property. You'll do an investment analysis and physically inspect the ones that look good on paper. You'll make an offer, receive counter-offers, and so on.

That said, there are a few minor differences when buying bank owned real estate:

  • The real estate negotiating process could take longer because your offer / counter-offer may have to be reviewed and approved by several individuals or companies.
  • Banks always want to sell these properties in "as is" condition – you'll be able to conduct a building inspection but the bank may not agree to do any repairs.
  • The bank may have its own non-standard version of the purchase agreement, oftentimes providing you with less flexibility and/or recourse.
  • Nothing will happen on nights and weekend because banks are closed.



TIPS FOR BUYING REO PROPERTIES


  • Before making an offer, have your agent ask the listing agent if he/she has any inspection reports, and/or a list of planned repair items.
  • Your offer should include a mortgage pre-approval letter.
  • Your offer should include an inspection contingency that allows you to void the sale if the inspection reveals structural damage that the bank won’t correct.
  • Even though your purchase is "as is," always ask the bank to make repairs or give you a credit after you've completed your inspections. Sometimes a bank will work with you to avoid having to put the property back on the market.
  • Most banks won't provide financing on these properties, but it doesn't hurt to ask.


FINAL THOUGHTS


Bank owned real estate must be carefully evaluated. Even though intuitively you would think that banks would do anything to get these non-performing assets off their books ASAP, you usually won't find an absolute steal because the banks will try to cut their losses. Your best opportunities are going to be REO properties:

  • That need a lot of work
  • That have something wrong with them
  • That are located in a slow moving market
  • That have been on the market for a long time
  • That are overpriced
  • That are flat out ugly
As you can see, buying bank owned real estate is a great way to execute a fixer upper strategy.



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5 Responses to Foreclosure Investing is Much Safer with REO Properties

  1. Roddy says:

    In my experience, I have to say that buying REO properties is much less risky than trying to do it through real estate auctions. At least with an REO property you have more visability into the information needed to actually make an informed decision. Just my two cents…

  2. RebelD says:

    REO properties can be good if you know what you are doing and you’re not trying to negotiate a steal of a deal. Just work with a expert, follow best practices, and do not negotiate too hard.

  3. punter says:

    I think the other commenters are taking this a little light. Yes REO property is less risky than flat out auctions, but you can still easily get burned because the banks generally will not check (or disclose) anything about zoning. Plus there are usually information gaps with REO properties. So even with these you must be cautious.

  4. Gizzie says:

    Not sure if anyone on this board can help, but I am struggling to try and figure out the relationship between REO properties and short sales and foreclosures. Can a short sale involve bank owned real estate? Or does this typically happen before the bank regains ownership?

  5. Ant says:

    My brother-in-law just bought 2 REO properties at a sheriff sale in Philadelphia. They are row homes in one of the Hispanic areas of the city. He got one for $20K and one for $25K. Property taxes are only about $500 annually. What a deal!

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