Investing in Bank Owned Properties (REO)

10 May

Many real estate investors focus mainly on buying foreclosures as a means to locate properties with a lot of equity at a discounted price, but purchasing a bank owned, or REO (Real Estate Owned) property can be just as profitable, if not more so. An REO is a property that is returned to the bank, or other lender, after being unsuccessful at the foreclosure auction. Many foreclosed properties don’t receive any bids at the auction because the minimum bid starts out including the loan balance, any accrued interest, and any attorney’s fees or any costs association with the foreclosure process. Since what is owed to the bank is almost always more than what the property is actually worth, very few foreclosure auctions end in a successful sale. Then the property is reverted back to the bank and becomes and REO.

How an REO is Sold

Banks, or other lending institutions, always want to sell a property “as is” if possible. They want to sell the property, but they also want to spend the least amount of money on it as they can get away with. Be sure to include in your offer an inspection contingency period that allows you to terminate the sale if an inspection reveals unanticipated damages that the bank will not fix.

Even though you agree to purchase an REO in “as is” condition, always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll be willing to renegotiate the price in order to save the sale, instead of having to put the property back on the market.

Advantages of Buying an REO

  • All liens against the property are removed once it becomes an REO, and taxes are paid.
  • Unlike properties at foreclosure auction, REOs can be inspected prior to contract, and are listed with real estate agents.
  • During slower markets, you can purchase an REO at a discount to the property’s actual value.
  • Lenders and banks do not like holding REOs, and try to get rid of them as quickly as possible.
  • The bank or lender that owns the property will often offer financing with better deals than they would offer on regular properties.
  • While many foreclosures are often in bad condition, REOs are typically restored to at least a somewhat decent condition by the lending bank.
  • The bank or lender that owns the property will often provide an allowance for certain repairs.
  • REOs will often times include appliances
  • REO properties are easy to find; they are usually listed on your local MLS (multiple listing service), or can be found on your local REO bank’s website.

As with any property, make sure to do your homework before making an offer. Make sure that the price you pay is comparable to other homes in the area, and consider the costs of renovations and repairs. It’s a myth that all foreclosures are a bargain.

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