Challenges of Buying Bank REO Investment Properties

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I was driving down the road the other day when I heard an advertisement that said, “Banks have hundreds of foreclosure properties, and they are very motivated to sell, and will take pennies on the dollar. Often times they will even finance them for little to no money down.” Sounds great, doesn’t it?

Chances are you’ve probably heard something similar and thought to yourself, “If it’s this easy, why doesn’t everyone buy properties this way?”

Now, I’m not here to tell you that you can’t get all of these things when buying bank real estate owned (REO) investment properties. Sometimes you can find a bank that will also finance the REO and is motivated. However, just because they are motivated or will finance it doesn’t mean it will be easy. While you can find great deals buying REOs, it does often times come with a price. REOs can be very challenging to purchase even when the bank is motivated, and buying bank owned REOs is not for the faint of heart.

Here are some of the biggest challenges to buying bank owned investment properties:

Lack of historical financial information – When you buy bank owned REO investment properties, often times there are very few financial statements to review. The financial picture can be a little murky. Let me explain: Most of the time when a bank takes over an investment property it’s because the property is not performing well. When they foreclose on the property, the owner doesn’t necessarily turn over all of their historical financial statements. Therefore, the bank may not have the financials to provide to you from when the previous owner operated the property.

If they have records, often times they are incomplete. Chances are a new management company has been hired. They will provide you with the current operations, but can only provide you information from when they took over the property. It’s normal to base your offer on only a few months of operating history. This lack of historical financial information makes it imperative for you to understand and be able to do your own evaluation of the property to make an informed investment decision.

Contract negotiations can be difficult and costly – Getting banks to agree to your offers can be difficult. Banks can be very hard negotiators. It can also be hard to get to the true decision maker. And, once you get the decision maker to agree, it doesn’t mean the bank committee will agree or not change things. Just because you have a Letter of Intent (LOI) (link to article) agreed to, that doesn’t mean the contract negotiations are over. Sometimes they are just getting started. Banks have very expensive attorneys and cumbersome contracts that can be timely and costly to negotiate. Banks can be very hard to negotiate with and have no problem reopening the negotiations during the contract phase.

Banks are used to getting their way. Most are less flexible than an individual seller and will have no problem pushing back on things you thought were already agreed to. You must have a good attorney to help you navigate the contract phase and make sure you are protected. Be ready for a bigger than normal legal bill to get your deal done. Also, be prepared to stand your ground and walk away if necessary. Banks will keep pushing until you push back.

They will expect you to put up a bigger deposit – In a typical investment property purchase the buyer will put down a good faith deposit when the contract is signed. This is usually 1-2% of the purchase price. It is put into escrow and credited to the sale when you close. It is normally refundable during the due diligence inspection period. Banks often require you to put a much higher percentage of the purchase price down as a deposit. It’s not uncommon for them to ask for upwards of 5% of the purchase price.

They can also require the deposit to go “hard” as soon as the contract is signed. The term going “hard” means that the deposit money is non-refundable. They can require this even before you’ve done your inspections. So, if you agree to these terms and find problems during the inspection period and choose not to move forward, you can kiss your deposit goodbye. If you are going to put down a non-refundable deposit, you need to make sure you have done your due diligence up front and are prepared to close.

Timing – Banks work on their own time tables. They will want shorter closing times and contingency periods. It’s not uncommon for banks to take weeks negotiating a contract only to require you to close in 30-45 days. If you buy a lot of properties through banks, you will have to get used to the hurry up and wait mentality. Meaning, they will want you to do everything on your end very fast, but they will take their time on their end. You are on their schedule. If you are going to buy properties from banks, it’s important to have your money and teams lined up ahead of time. You must be prepared to move quickly.

Buying REO investment properties from banks can be a great way to make money in real estate. You can find some great deals, but you must be prepared. If you can manage the tough negotiations and costly contracts, you can find great opportunities. You must be prepared to move fast, put down a larger deposit, have your lawyer ready to go, and move quickly to get the best deals. However, once you get the deal done, you can have a great asset for years to come. By then, you’ll forget how difficult it was to get the contract done.

About Author

Spencer Cullor

Spencer Cullor has spent the last 10 years as a real estate investor and currently owns single family, multifamily apartments, and commercial properties with his investment partners. Currently he is the Director of Acquisitions and Principal of ApartmentVestors, a multifamily real estate investment company.


  1. Well written and absolutely true! Bank owned properties can definitely be a challenge. One other issue we have run into is banks generally look at offers from owner occupants prior to investors. Also, several bank owned deals we have worked on have been multiple offer situations selling for well above asking price.

  2. 7 top reasons to create YOUR wealth through real estate…..

    Reason # 1- Passive Positive Cash Flow:

    The best way to become truly financially free! Passive positive cash flow allows you to spend time on things you want to do, not on things you have to do and this is key! Whether it is spending time with your loved ones or start a new project, it is your choice! In our opinion, this is the most important reason to buy, fix and rent real estate properties.

    Cash flow is calculated by subtracting all the property expenses, such as taxes, insurance, and others, from the monthly rental income. Real estate experts do not buy rental properties unless the cash flow is positive. Obviously, the bigger the monthly cash flow, the better the Return On Investment (ROI). This strategy is known as BUY, FIX & RENT.

    Reason # 2- Create equity by renovating distressed properties: Sophisticated investors intentionally purchase properties at wholesale prices because the properties could use some cosmetic repairs. After these repairs are taken care of and improvements have been made, the value of the property will automatically go up. This results in an immediate increase in equity, and an opportunity for a family to own a great home thanks to you! This strategy is known as BUY, FIX & SELL.

    Reason #3- Appreciation over the years:

    Over the years, material things tend to lose value like cars, electronics, machines, etc… Real estate on the other hand increases its value over time. We are all witnesses that appreciation does not always happen in a uniform way, in some years we even face depreciation. But the truth is, appreciation grows an average of 10% annually, this means that it is very likely that some properties could double their value in a ten year cycle.

    Reason #4- Leverage:

    Is the ability of controlling an investment through a loan requiring the small amounts of out-of-pocket cash and increasing your return on investment. This is great news! You can now own many properties instead of just one with the use of leverage. As an example, leverage allows you to buy or control a $100,000 house with only 10% or 20% down payment.

    Reason #5- Inflation increases rental income:

    Rents usually increase with inflation, while mortgage payments on the property remain the same. This increases cash flow by receiving more rent income without increased expense for holding the property.

    Reason #6- Reducing the mortgage:

    Amortization, or paying down the loan, frees up more investment monetary resources to increase leverage. Investors sometimes use increased equity in one property to free up funds to invest in the next one. In rental properties, the tenants will pay be paying off your mortgage debt each time they make a monthly payment.

    Reason #7- Depreciation expense is tax deductible:

    By buying and holding real estate properties investors have the right to deduct depreciation as an expense when the yearly tax reports are prepared. This is a great way to save significant amount money each year instead of paying it to Uncle Sam. Ask your accountant for more info on how you can benefit from these and other perks once you become a real estate investor!

  3. Paul Salmela on

    In the last three years I have purchased 17 REO properties (mainly condos and town homes). I find that banks are one of the best sellers because they like to get rid of their assets quickly and will sell for significantly less than market price. With all the properties I have purchased I have not once used an attorney but have made sure to get title insurance (most of the time the seller will pay for this). I have learned a few things in the past few years.. 1) Wait until the property has been on the market for at least 30 days. If a property has been on the market for 90+ days the bank will usually sell for a large discount. 2) Make cash offers. This isn’t always easy but if you can make a cash offer expect to take 10 – 20% off the listing price. 3) In your PA offer large earnest money payments. The fact that banks require 5% was written in the article and I would recommend putting up 10%. If you’re going to close in 30 days putting up 10% earnest money doesn’t cost all that much. 4) And finally make lots of low-ball offers. Eventually one of your offers will be accepted.

    • Allen Singleton on

      Hello Paul:

      I see you have great experience with REO properties. I am looking to invest in the REO market. I spent 20+ years in Chicago, but have recently relocated to Atlanta, Ga.

      1.) Would you recommend I invest in Chicago since I know the area well, even though I live out of state?
      2.)With the purchase of Condo’s – what strategies did you use to get your investment back?
      3.) Can you give me an example of your experience with “low balling” an offer and it working effectively?


  4. I agree with Paul and Wang that buying REOs is a great way to own property. I buy REOs that are in good to great condition. The only differance, I pay cash (bigger discounts), add value, refinance (get ALL my money back) and rent for a positive monthly cash flow. Even though property values in my area has gone down, still have lots of equity:) For instance, I was e-mailed a listing today: 2,000 square foot, 5 beds/ 1.5 baths, assessed at $121,000, sold last year for $144,000, listed at $56,000 and needing $5,000 in repairs. I know I could get at $49,500, rehab, refinance and get a BIG positive monthly cash flow with lots of equity.
    Nice article Spencer.

    • Allen Singleton on

      Hello Jim:

      I am new to real estate investing and had a few questions for you.

      1.) How do you determine if a REO is in “good to great condition” if the bank doesn’t have financial history of the property prior to the bank taking possession?
      2.) When acquiring money from private lenders to make purchases- how can you calculate rehab cost so that you can “add value and refinance to get ALL of your money back” ?


  5. Romano Pontes on

    Jim, Hello My name is Romano. I wanted to ask you a question re: Refinancing of the Properties. How do you get it refinanced? Can you please share some insight into that.

    I have been buying in cash but I have not yet figured out the best way to do the refinance.

    Thanks Romano

    • Hi, Romano. After I buy a property for cash, I go in and fix it up, get it rented out. After about a month or two, go to my Credit Union and apply for refinance. They come out and appraised it (usally double). I tell them that all I want is what I got into it, for instance; purchase price $60,000, repairs $5,000, I want to refinance it at $68,000 to cover all cost and move on to the next one. I make sure theirs at least $200 a month positive cash flow, takes bout two to three weeks for the refinance. I’ve done this on the last eight properties, still have the same amount of money when started plus a lot more cash coming in. Believe it or not, they called me up and want me to purchase ten more properties, so much for retirement!

      • John LeBrecht on


        Great info thanks. My question is: will they let you cash out on the refi–ie get back ALL the cash you had in and then some depending on the equity? I was under the impression that you could not cash out fully. Additionally, what kind of tax bill would this kind of transaction create.


        • John, good questions. I can tell you the cash-out refi can be done. It just depends on the bank and property and current value. We are in the process of doing it on an apartment complex right now. It’s definitely not as easy as it used to be, but as long as you have a strong debt coverage ratio and operating history it can be done depending on the bank.

          On taxes, it all depends on your area. I would talk to a real estate tax consultant in your area to find out for sure. In my area, a refinance does not trigger taxes being readjusted. It doesn’t affect taxes at all. But, it might in others. Property tax assessment all depends on the local area and how they handle them.

          Best of luck and let me know if I can be of any assistance.

  6. HI SPENCER I am currently in realistate class trying to get my license, The main reason i took the course is so i could learn the ins and out about buying properties.I currently own one home, but i would like to start buying more investment properties and eventually own my own realistate invest company. The only problem is that i dont have any cash for a down payment. I put all my money in primary home we just bought a yearago.I dont want to pull my equity out of my home if i don’t have to. Do you have any suggestions.

    • Charles, thank you for your message and congrats on working on your license. I think it will teach you a lot about the process. Your challenge is one of the biggest and most common in real estate investing. Where to get the money to grow your business when yours is all tied up. What we do and what I would highly recommend to you is learn how to raise private money. Find out all you can about it. It’s the fastest short cut for you to buy that next property and get your investment career started. Sure, you’ll have to give up some of the profits, but you’ll also be able to take on more projects faster than you could without it.

      The good news is that if you’re going to be flipping homes or buying to hold for cash flow you can start small. On the smaller deals you can fund them easily with one investor at a time so you don’t have to go out and find a ton of investors, just one or two good ones.

      There is a ton of great info out there on raising private money to fund real estate. Let me know if you’d like me to point you in the right direction there. Just a quick word of caution, make sure you follow the rules and regulations in your area and take some time to learn about it before going out and asking people for money. A little preparation and knowledge can take you a long way.

      Best of luck!

        • Brian, there are a lot of good resources for helping you raise private money. I would definitely check out the forums here on BiggerPockets. You can also get some great information through some SEC attorney’s that help people raise money for their investments all the time. There are a few good ones out there if you search google for them. It really isn’t a “one size fits all” proposition when it comes to raising private money for your deals. There are a lot of different factors involved. I wish you the best of luck and if we can be of any help please let me know.

  7. Hi Spencer, I am trained attorney however not qualified in the US. I currently live in Maryland and I am seriously considering entering the real estate market as an investor but I would like to find out whether I would require a real estate license to be able to buy as an investor or buy investment properties. Secondly, if I do not need a license where can I get information as to available properties to buy. Thirdly, any information you can direct me to would be greatly appreciated. Thank you

    • Caleb, good questions and best of luck getting started. To answer a few of them, no you do not have to be a licensed real estate agent to buy real estate. No licenses are required to buy. Information on homes or apartments or other real estate for sale is readily available online as well as through brokers in your area. One place to check would be that has listings of homes, etc for sale all over the US. Local brokerage firms can also be very helpful. You can find them online, in the yellow pages, or get their information off of the for sale signs as your drive through neighborhoods you would consider investing in.

      This website has many great resources for learning how to buy real estate. I would also suggest attending your local Real Estate Investment Group or REIA in your area. There you will meet local investors and gain access to lots of free information.

      If there is anything else we can assist you with, please let me know. Best of luck!


  8. Allen Singleton on

    Hello Spencer,

    I am a new real estate investor looking to purchase a few property’s in 2013. I would like to say thank you for the information that you provided. I have a few questions here:
    1.) If your tenants are paying the mortgage loan- how do you determine what your profit will be after expenses?
    2.) As far as REO’s, If banks work better with cash up front- how do you get private investing lenders to issue you money to work with before knowing which property you will be securing?
    3.) What would you advise on purchasing multi-family units with our current market conditions? Since it is profitable, would that be an area that a new investor can enter?


    • Thanks Allen! I’ll try to answer your questions.
      1.) If your tenants are paying the mortgage loan- how do you determine what your profit will be after expenses? Allen, you need to learn how to evaluate multifamily properties. Each property should have expenses for repairs, maintenance, utilities, contract services, loan payments, administrative, taxes, etc. Once you know the income and the expenses you can determine the profit. There are lots of posts and reports out there that can show you how to factor in these expenses. You need to know how to do this before buying.
      2.) As far as REO’s, If banks work better with cash up front- how do you get private investing lenders to issue you money to work with before knowing which property you will be securing? Good question, you can do this by first developing relationships with those that might invest, tell them about the types of properties you’re going to be buying, and make sure you have the legal paperwork done up front to keep everything legal when working with investors. If you don’t have a property yet, you’re going to have to do a good job of showing them the type of properties you’re going to be investing in.
      3.) What would you advise on purchasing multi-family units with our current market conditions? Since it is profitable, would that be an area that a new investor can enter? There are tons of ways and areas to make money in real estate. I do like multifamily because you can make money through the cash flow and appreciation. I suggest starting small wherever you get started and learn as much as you can about the specific area you are going to invest to cut down on your learning curve. There is a ton of information in the forums here and through local real estate investment groups, books, etc.

      Best of luck!

  9. I have a simple question that may end up with a not so simple answer. I just opened a realestate investentment company with a partner. We are both working full time jobs until we really get off the ground. We have several hundred thousand dollars waiting to buy properties in cash, fix them up and rent for passive income. My question is this; if you have a property address what is the easiest way to find out who the lender is. Basically I know the property is in foreclosure or will be going into foreclosure and would like to negotiate with the bank. Thx

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