Why Buy An REO Property?

What is an REO Property or Bank REO?

Now is a great time to consider REO property purchases since banks need to recoup some of their heavy losses from a tough year. Read on to learn more.

An REO is real estate owned by the bank. A bank REO is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and has been unable to receive any bids. As a result, the bank then becomes the owner of the property.  Naturally, the bank does not want to keep the REO any longer than necessary which is where the great opportunity arises for you, the Investor. Obviously, not every REO is going to be a good deal, but with the proper research there are many excellent deals to be acquired.

You may be asking if this is a foreclosure.  The home was foreclosed on because the owner failed to make scheduled payment, yes. But now that the property went through the auction property and is now under ownership by the bank, it is no longer in the foreclosure stage which is why the heading changes to REO and you deal directly with the bank.

Advantages & Disadvantages of REO Properties

There are many advantages to purchasing properties using the REO route. First, you have time to do some research into the property since you are not working against the clock of an upcoming auction date.  Another major advantage is that you can inspect the property before you buy, when you cannot do this typically with the majority of foreclosed homes.  Many of you investors will know first hand the absolute make-or-break necessity of a full inspection, especially at this stage in the game.

One thing to keep in mind when researching REOs is the type of loan that was on the property. It is often easier to negotiate on a deal where the property had conventional financing than one that had FHA or VA financing - since the government is involved. These programs allow for the government to buy back the properties should it choose. Homes that had conventional loans the first time are often purchased for just a fraction of their value, meaning they can make an investor a lot more money.

There are some REO properties to pay particular attention to and perhaps avoid altogether. Make sure you know the property inside and out.  There is a reason the property made it all the way to the auction block, did not get a bid AND had to be retained by the bank.  That's a lot to get through. Make sure you know the answers to such questions as: Were there IRS tax liens against it? Did the home just not have enough equity? Was the property too badly damaged (careful - this aspect can be well hidden)? What is the location and what are the closest busy streets? Make sure the location is good. This is a repeated maxim in real estate, but many do not follow it. If the bank cannot answer all of these questions then that should shoot up a red flag.  A good deal should be open in the sense that you can walk in and do your research to come to an educated decision with your investment team.

Why Banks Are Ready To Sell REO Properties

Banks are not set up to deal with real estate. They are set up to finance properties, not buy and sell them. Because they don't have major systems in place it often takes them some time to get the ball rolling on repairing the property and getting an agent to list it. What this means for you is that while the bank attempts to get their business together on the deal, they are losing money and the federal government often penalizes them for each REO they acquire.

Because time is money for banks at this stage, they are willing to sell the property fast and cheap. In fact, banks commonly sell an REO property for around 30% of its value just to complete the transaction. This may seem counterintuitive, but they lose less money then they would have if they had been hardball negotiators. They want the deal done. And since you can inspect the property and come in with an educated proposal, they will take the offer seriously and work with you.  

Generally, REOs are excellent investment opportunities as long as you take the time to research the property and you know what you are looking for.  The bank is simply ready to walk away, not unlike a seller in a short-sale situation.  They will be ready to sit at the table with you.  As such, REO purchases are a great way to get the ball rolling in your real estate portfolio or add an extra strategy to your already successful team. Good luck!