REO stands for real estate owned. This term is used when referring to a home that has gone through the foreclosure process, failed to find a buyer at the auction, and is now owned by the bank.

One of the benefits of buying a bank-owned REO property is that investors can purchase the home free of title liens and other claims. Lenders generally expunge all second and third liens, as wells as delinquent taxes, HOA and mechanics’ liens. Another benefit of buying an REO property is that they are generally vacant. Investors can save a tremendous amount of time and energy because the eviction process has been taking care of by the bank.

Not all REO properties are available to the general public. Banks typically like to sell these properties to investors that buy million dollar portfolios of REO properties at one time. Scales of economies work in favor of both, the bank and the investor(s). Banks can move hundreds of properties at one time saving them time and money. The investors get a portfolio of homes at a substantial savings as opposed to buying them one at a time. Some of these portfolios start at as much as $5 million.

There are many opportunities for everyday investors to take advantage of these REO properties on a single home basis. Every city has realtors that work with the banks to list and sell their properties. Networking within your investor community can lead to these relationships. REO properties are great homes for investors to buy because they are generally paying below market for the home, and there is a lot of inventory and selection.

Financing REO properties is the same as any other investment property. Plan to contribute at least 10% or more toward the down payment. Do your due diligence to properly cash flow your investment; with this you will be able to weather any market volatility in the future.

Note from editor: For a directory of Banks offering REOs, visit our Bank REO homes page. Get involved in our REO discussion forum to discuss anything to do with these bank owned properties. Finally, if you’re interested, we also have a page with useful information about the foreclosure process.

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Tags: bank owned property, bank-REO, foreclosure, foreclosure process, Foreclosures, real-estate-owned, REO

For thousands of homeowners across the country saddled with adjustable-rate mortgages, 2008 promises to be a financially challenging year as interest rates begin re-setting thereby drastically increasing monthly mortgage payments.

It is this problematic course of events in the residential market that has seen the number of foreclosures skyrocket over the past several months, with even greater increases expected in the New Year and beyond.

However, there is some hope for homeowners despite the dreary forecast of what’s to come, and as in any turbulent market, there is opportunity for investors who are willing to take some risks.

If you currently own a home that is, or soon will be, in foreclosure you have one favorable bargaining chip that should bring some level of comfort: Banks (and other lenders) don’t want to take properties back from borrowers. Why? There are two simple answers. 1.) The foreclosure process is very expensive for the lender and 2.) Banks/lenders are grossly undermanned and are not equipped to deal with the deluge of foreclosures that shall soon occur.

Recent published reports from industry insiders suggest that one very large bank, that shall remain nameless in this article, incurs an average cost of $60,000.00 in connection with initiating a residential foreclosure. That dollar amount includes property maintenance, attorneys’ fees, taxes, pay-offs to junior lien holders, etc. From a business standpoint, most lenders realize that it is wise to try and negotiate a payment plan, including some debt forbearance, with the homeowner rather than incur the expense of a foreclosure action.

Lenders lack manpower to deal with the volume of foreclosures set to take place in 2008. As a result, although most states allow the lender to initiate a foreclosure action once the borrower is delinquent 30 days on the mortgage payments, the national average before lenders take action is 7 months. Lenders just don’t have the personnel to deal with the volume in a speedier fashion.

This should be encouraging news to homeowners who have fallen behind in their payments. Many lenders are willing to recognize your financial woes (sudden unemployment, disability) and work out a payment arrangement that addresses your mortgage arrears. However, borrowers need to be proactive. Instead of avoiding your bank’s phone calls, take the initiative to communicate with your lender. It is important to be honest about your current and future financial status. Often times, the lender will accept a re-payment and/or forbearance plan that you would have never thought acceptable. Remember, foreclosures cost lenders a lot of money!

If you are an investor, then a residential market that is rife with foreclosures or soon-to-be foreclosures may represent a tremendous opportunity. Pre-foreclosures, which are often referred to as “short-sales”, allow an investor to purchase a property for an amount that is below what is owed to the bank. Although these types of transactions require specific documentation and lender approval, they may benefit both a purchaser and seller.

In a pre-foreclosure situation, the seller, who is delinquent in mortgage payments, has an opportunity to preserve (or at least reduce the damage to) his/her credit rating by avoiding a full-scale foreclosure proceeding. The buyer, often times an astute investor, may end up purchasing the property at a favorable price. Although this sounds very appealing to all parties, there are some pitfalls. Sometimes the debt forgiveness can result in income to the seller that must be reported to the IRS on a 1099 form. It can also take as long as 60 days to receive lender approval for a pre-foreclosure sale–such a long time period could affect a potential buyer’s interest-rate lock. Finally, most lenders impose strict requirements for a pre-foreclosure sale that must be met in order for the deal to close.

Whether you are a homeowner facing a foreclosure or an investor waiting to capitalize on a depressed market, there are options that will allow many to survive, and even thrive, despite the turmoil that many have predicted as 2007 comes to a close.

Tags: bank-REO, distressed, foreclosure, lender, loan, mortgage, preforeclosure, REO, short sale

I was reading a post by one of my favorite real estate bloggers, Pat Kitano, about how bloggers seem to be ignoring the foreclosure business, and I was a bit surprised. It seems that many of the other blogs out there have decided to play down the problem or feel that there isn’t a problem at all.

As a site that is foremost focused on investors, we see this from both sides. While it is very unfortunate that people are losing their homes in record numbers, the investment community is chomping at the bit, waiting for the record number of foreclosures to continue. This reality, where people can’t keep up with rising payments is taking a bite out of not only the US Economy, but also the global economy as well. As Russ Amy put it, we all need to “write about it” (the problem), because it isn’t going to just go away!

Homeowners & Investors
- Want to find out how foreclosures work? Read about The Foreclosure Process

Homeowners
- We set up a Foreclosure Help Forum for people to get advice when they find themselves behind payments or in other mortgage trouble. Some of the tips given to the folks who have already begun to participate on this forum have been fantastic and quite helpful!

Investors
- Here are some advantages of buying bank owned properties aka. REOs
- Looking for pre-foreclosures? Here’s a great article detailing your 3 shots at getting them, and here’s another that talks about where to find foreclosures.

Think Foreclosures aren’t a Major Problem?

Lets look at some recent news to see if you’re right . . .

- According to Marketwatch, “Home prices are falling everywhere.”
For the national Case-Shiller home price index, prices fell 1.7% in the third quarter compared with the second quarter, and were down a record 4.5% in the past year. It was the largest quarter-to-quarter price decline in the 20 years covered by the index.
This can directly be attributed to the sub-prime blowout and resulting foreclosure massacre that has been taking place around the country. While real estate is a local issue, primarily, this and other signs prove that we are facing a national real estate situation here as well.

- Yahoo Finance has a piece that details how “Even average homeowners feel rising mortgage floodwaters”:
With property values dropping in many areas of the country, a growing number of homeowners — particularly those who bought their house in the last five years — are looking at the prospect of being “underwater” on the mortgage. That’s when the value of the home is less than the amount remaining on the loan used to buy it. So while the nation has been focused on a record-high rate of foreclosures, the tide has been rising on a lot of people who simply had bad timing.
Clearly, not just those who are being foreclosed on are feeling the heat. With lenders practically giving away loans to anyone with or without the ability to pay them off each month, we’ve slowly built our own grave. The government watched as this happened and encouraged it so the White House could tout a strong and growing economy - not so strong now, eh?

- Even the always positive National Association of Realtors (NAR) seems to finally be facing reality after releasing a new report that details how home sales declined in 46 states in the 3rd quarter.

Is there any good news in the Housing Market?

It looks like Mortgage rates have dropped to a 6 month low, and whispers of another drop in interest rates have boosted the stock market over 300 points today (pre-close).

Tags: bank-REO, default, Economy, foreclosure, Foreclosures, housing, NAR, realtor, REO

A new member to our real estate forums recently inquired about putting offers in on REO (Real Estate Owned) Properties. The property he was looking at was listed with an agent for 388,000. Upon doing some research, he found that the home had a 83,000 balance on the original mortgage. In making an offer, he thought that the balance on the mortgage might have some relation to what he should offer (it does not), and wanted to know if the property could sell for somewhere around $100,000.

Another member, who has worked closely with REOs posted a very informative response to this question, that I thought worth sharing with you:

I’m a former REO Asset Manager for Ocwen and EMC Mortgage companies. I currently manage/sale REO properties as an agent.

First off, an asset manager’s job is to sell the property for market value or higher, within 60 to 90 days.

Second; Banks can’t hold investment properties? They often rent out their REOs for profit. And even when they’re not rented, it’s not uncommon for an asset manager to have a few properties in his/her portflolio for more than a year.

Dreaming? Yes you are dreaming.
If it were so easy to walk in on $300,000 in equity, the other 10,000 investors in your area would be all over it. That will drive up the price if nothing else will. Besides, the sun will stop burning before a bank would sell a property for under $100,000 with a $300,000 appraisal.

PROBLEMS didn’t stop others from bidding at the auction? THE BANK DID..
The bank has valuations (BPOs and Appraisals) that tell them what the property is worth. Their attorney bids up to their pre-set amount. THE BANK COULD CARE LESS ABOUT THE $83,000 BALANCE IF THEY HAVE AN APPRAISAL AND BPO THAT TELLS THEM THAT THE PROPERTY IS WORTH $380,000. Do you think the bank has a problem with making a $300,000 profit?

WHERE DOES THIS STUFF COME FROM?

MOST IMPORTANT
Having worked as an asset manager for 2 major REO players; I nor the other 100 asset managers that I worked with, ever looked at the previous mortgage balance. Simply put, it had no bearing on what we listed it for, and ultimately sold it for. Also, most of the outsourced asset management firms don’t even have access to these numbers, not that it would matter anyway.

And stop sending the Garbage along with your offers. We know about the property’s condition. And since you want to buy it, we especially don’t care about exaggerated assessments of the property. Simply put, we throw them in the trash without ever reading them. As an agent, I let everyone know that such items will not be forwarded to the asset manager. (Showing feedback is welcomed, but that stops at the offer phase)

Bottom line, Asset Managers have to make decisions within seconds, not minutes or hours. Most handle large portfolios and don’t have time to “investigate”. This is why they have systems and procedures. A property goes on the market for a certain price; offers can be accepted or countered within a pre-set limit; and price reductions will occur at pre-set limits and times. That’s it.

Will

I’m glad that Will was willing to share all of that information with everyone, as I think it gives some people a change to see what things look like from the other side of the business.

What do you think?

Tags: asset-manager, bank-REO, buy-REO, foreclosure, mortgage, offer-REO, real estate, real estate investing, real-estate-owned, REO, REO-agent, REO-broker