When seeking out investment opportunities, it’s important to leave no stone unturned. Buying properties that are dubbed REO properties or real estate owned properties is one avenue worth considering. Investing in REO properties offers certain advantages but it’s essential that investors understand the risks as well.
What Are REO Properties?
In the simplest terms, a real estate owned property is any commercial or residential property that has been repossessed by a bank or mortgage lender. The process by which a property becomes an REO property is fairly straightforward.
When a property owner fails to meet their mortgage obligations, the lender can initiate foreclosure proceedings to recoup the loss on the investment. If the property does not sell at auction or the lender is the highest bidder, the lender assumes ownership. Once a property becomes real estate owned, the bank or mortgage company will prepare the property for sale and put it on the market.
Why REO Properties Are an Attractive Option
From an investor’s perspective, REO properties may be more appealing than a regular resale property for a few reasons. First, the lender may be highly motivated to sell the property. If that’s the case, you would have a bargaining chip of sorts when it comes to negotiating things like the final purchase price and closing costs.
In some ways, buying directly from the lender can be easier because it eliminates certain problems that can arise when a homeowner or commercial property owner is involved. For example, with a bank-owned home, the buyer would not have to be concerned about emotions directing the negotiations.
It’s also possible to pay less for an REO property than you would a property that’s seller-owned. These properties may be priced at or below market value, which is a plus for buyers who are hoping to get a deal.
Finding REO Properties for Sale
There are several avenues investors can use to locate REO investment opportunities. The first is to search through REO listings online. RealtyTrac, for example, offers residential REO properties while LoopNet has an extensive database of commercial listings.
Another option for finding REO properties is approaching lenders directly. Larger banks often have an entire department dedicated to the sale of REO properties and they may feature listings on their website. With a smaller bank, it may be necessary to contact a local branch to determine whether any properties are available and who oversees sales.
Enlisting the help of a real estate agent can also be useful in pinpointing REO opportunities. Look for an agent who specializes in dealing with these types of properties in the market segment that you’re interested in.
Buying an REO Property
Finding a suitable real estate owned property is the smallest hurdle buyers must overcome. The next and more challenging phase is negotiating the purchase of one of these properties.
There are several things buyers must be aware of going into the negotiation process. First, individual lenders can set their own guidelines for the sale of REO properties. For instance, some lenders may require a larger deposit of earnest money or stipulate that the deposit be nonrefundable.
Next, REO properties are usually sold “as is”, which means the buyer is responsible for covering the cost of any necessary repairs or upgrades. An inspection and appraisal are part of the buying process but these don’t occur until after an offer has been made. It’s a wise move to include a clause in the offer allowing for retraction if the inspection uncovers a major structural issue.
When formulating an offer, buyers should use the property’s fair market value as a guideline. Depending on how much competition there is for the property, the starting bid may be the same as the lender’s asking price. If there are no other interested buyers, it may be possible to negotiate a discount but be wary of undercutting the price too much.
One final consideration to keep in mind is financing. Buyers who are not paying with cash will need to get pre-approval for a loan prior to making an offer. When a property requires substantial work, it may become more difficult to obtain a loan without offering a larger down payment.
Selling REO Properties
While some buyers purchase an REO with the intention of living in the home, others see it purely as an investment opportunity. Investors who hope to turn a profit by reselling the property will first need to make it as attractive as possible to buyers.
From a cosmetic standpoint, that may involve completing renovations on the interior or exterior, which is something you’d need to budget carefully for.
In terms of ensuring the property is physically sound, that would require addressing any issues raised during the inspection process.
Once the property is ready, the next step is bringing in a real estate agent to help with the sale. The agent can offer insight into how to set the sale price and what the best strategies are for marketing the property.
Risk and Rewards of REO Properties for Investors
Investing in a real estate owned property offers several benefits for investors compared to other types of real estate. In most cases, for example, the lender will take steps to clear any tax debts, liens or title issues connected to the property before offering it for sale so there are fewer obstacles to buying.
The lender is also responsible for removing any occupants of the property prior to the sale. That applies to homeowners who may be resistant to vacating a residential property or tenants of a commercial property. That allows the investor to avoid the time and expense associated with having to initiate eviction proceedings.
Again, perhaps the strongest incentive for investors is the potential to earn a decent return with one of these properties. A lower asking price can positively impact the property’s profitability once the investor is ready to sell it or rent it out.
In terms of the drawbacks, there are some pitfalls to keep in mind beginning with the property’s condition. If the inspection fails to reveal any major damage that isn’t discovered until after the purchase is complete, the investor is responsible for addressing it. Having to spend additional money to get the property ready for resale or leasing can eat into any profits you’re anticipating.