REO's just leftovers that no investors wanted?
Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
Since REO's are bank owned and have already gone through the foreclosure and auction process does that mean they are a less desired investment property? I would think that all of the seasoned and experienced investors who buy their properties via auction or at the courthouse steps would have picked the property up during the foreclosure process if it really had good opportunity. Especially in a competitive market where there are tons of investors looking for deals every day. What are some example instances where a property would go through the foreclosure and auction process and make it to the REO stage but still have potential to be a great investment opportunity? Was the property just overlooked? Perhaps listed incorrectly? Went under the radar?
No insight on this?
I have not done much with auctions, so I can't speak to that directly. But it seems to me that like any other deal, if the numbers make sense, pull the trigger.
Whether or not, someone else passed it over doesn't make any difference to me.
@Brian Garrett In my area, a lot of houses go through foreclosure and the auction with more than the house is worth. So the reserve is way too high for an investor or sometimes even a owner occupant to buy. Later the house will be sold as reo and the price will go down eventually and will get sold. It is silly to be done that way, but I guess the banks feel like they have a better chance to make money like that.
REO's are great investment opportunities. To grasp why a home would go into default then foreclosure, that eventually leads to the property being an REO, you have to wrap your mind around the dynamics of economic trends in this country. In the early 2000's there was a supply and demand situation across the US, thus creating the bubble. Houses and developments started popping up everywhere, property value on existing homes went through the roof, HELOCS and 2nd mortgages were being taken out on homes, and the money was used friviously financing cruises, international vacations, and time share purchases. I will talk on the subject of the existing home for a moment. These houses were most likely purchased in the late 80's early 90's, and seen an increase of $100-$200k,from their purchase price. The owners refinanced pulling the equity and essentially Pissed the money away. The loan was structured with creative financing hence fraudulent, to have a lower payment for X years and a balloon payment due on a specified date. The home owner in their haste to enjoy the unforeseen windfall, became oblivious to the lurking storm. 2008, the economy tanks, hundreds of thousands lose their jobs. These aforementioned balloon payments are coming due, the soul income earner has succumbed to the recession. Unable to make the balloon payment,and depleted the HELOC, the house refinances at a higher percentage rate and an ARM. Interest rates increase, and the homeowner can't make the payment. Lending has ceased, the banks are not lending,jobs are still scarce, and the foreclosure process begins. The house doesn't go on the market, or maybe it did, but the recession has caused the value to decline and the market is in despair. The owner is upside down on the house, and. cannot sell for what is owed. In this economic downturn the investors were redirecting their assets to metals,because real estate was sinking. Once a property is in foreclosure, certain loans are garaunteed by our federal government. The lender would be me paid, and part of the complexity of those politics requires the house to remain off the market creating the REO. After the one year the home which is but a spec in the pool of foreclosed homes, are offered in bulk to wholesalers who in turn provide discount prices to rehabbers, eventually recirculating the property.
I will stop with that but the other part of the story is the new homes purchased in abundance, that became REO.
As an example,I had an REO on discount $770K, that required no rehab, and brought +3M.
There is a lot to comprehend when exploring foreclosed properties and REO's. I hope this long winded response shines some light on your inquiry.
I have not done much with auctions, so I can't speak to that directly. But it seems to me that like any other deal, if the numbers make sense, pull the trigger.
Whether or not, someone else passed it over doesn't make any difference to me.
I understand it's all about the numbers at the end of the day I'm just asking out of curiosity.
@Brian Garrett In my area, a lot of houses go through foreclosure and the auction with more than the house is worth. So the reserve is way too high for an investor or sometimes even a owner occupant to buy. Later the house will be sold as reo and the price will go down eventually and will get sold. It is silly to be done that way, but I guess the banks feel like they have a better chance to make money like that.
Makes sense I guess sometimes a bank can try and get greedy during the foreclosure/auction process and then realize they need to come down on price after it doesn't sell.
REO's are great investment opportunities. To grasp why a home would go into default then foreclosure, that eventually leads to the property being an REO, you have to wrap your mind around the dynamics of economic trends in this country. In the early 2000's there was a supply and demand situation across the US, thus creating the bubble. Houses and developments started popping up everywhere, property value on existing homes went through the roof, HELOCS and 2nd mortgages were being taken out on homes, and the money was used friviously financing cruises, international vacations, and time share purchases. I will talk on the subject of the existing home for a moment. These houses were most likely purchased in the late 80's early 90's, and seen an increase of $100-$200k,from their purchase price. The owners refinanced pulling the equity and essentially Pissed the money away. The loan was structured with creative financing hence fraudulent, to have a lower payment for X years and a balloon payment due on a specified date. The home owner in their haste to enjoy the unforeseen windfall, became oblivious to the lurking storm. 2008, the economy tanks, hundreds of thousands lose their jobs. These aforementioned balloon payments are coming due, the soul income earner has succumbed to the recession. Unable to make the balloon payment,and depleted the HELOC, the house refinances at a higher percentage rate and an ARM. Interest rates increase, and the homeowner can't make the payment. Lending has ceased, the banks are not lending,jobs are still scarce, and the foreclosure process begins. The house doesn't go on the market, or maybe it did, but the recession has caused the value to decline and the market is in despair. The owner is upside down on the house, and. cannot sell for what is owed. In this economic downturn the investors were redirecting their assets to metals,because real estate was sinking. Once a property is in foreclosure, certain loans are garaunteed by our federal government. The lender would be me paid, and part of the complexity of those politics requires the house to remain off the market creating the REO. After the one year the home which is but a spec in the pool of foreclosed homes, are offered in bulk to wholesalers who in turn provide discount prices to rehabbers, eventually recirculating the property.
I will stop with that but the other part of the story is the new homes purchased in abundance, that became REO.
As an example,I had an REO on discount $770K, that required no rehab, and brought +3M.
There is a lot to comprehend when exploring foreclosed properties and REO's. I hope this long winded response shines some light on your inquiry.
Thanks for your input. I understand why homes go into foreclosure and what would cause that to happen I was asking more specifically about investors passing up on the property at auction.
from what i understand, at least in my area there's a process. Once the bank starts foreclosure the property goes to sheriff's sale. At this auction the bank will have to be there and must buy it back for up to 60% or something like that of the value. They auction it twice if it doesn't go for enough. This qualifies them to use the pmi to recoup losses. Then after the bank owns it again, they can sell for what it's worth.
As an example, I bought a reo The realtor said it had $70,000 in loans. I wouldn't doubt it. It had newish, 10 years or less, roof,siding, and Windows. So .6 × $70,000 Is $42,000 that's the lowest it could go for at sheriff's auction. It wasn't worth 70 or 42. I got it for $6500.
Brian G.
50% of auctions fail. It has nothing to do with investors passing over the house.
When a house goes through auction, the lender is trying to recoup the money owed on the property. If that amount is excessively high, they aren't going to get the price and then they are forced to buy back the house.
Auctions usually have a reserve price that can often be higher than the house is worth due to the owner over borrowing or being caught short in a falling market.
And in a typical auction, the house is still occupied and with multiple liens attached. That combination makes the house too expensive for the market.
Once the bank buys it back at auction, they will be responsible for removing the occupants and settling the liens before listing it on the market as an REO.
Great insight and information. Thanks Christopher.
from what i understand, at least in my area there's a process. Once the bank starts foreclosure the property goes to sheriff's sale. At this auction the bank will have to be there and must buy it back for up to 60% or something like that of the value. They auction it twice if it doesn't go for enough. This qualifies them to use the pmi to recoup losses. Then after the bank owns it again, they can sell for what it's worth.
As an example, I bought a reo The realtor said it had $70,000 in loans. I wouldn't doubt it. It had newish, 10 years or less, roof,siding, and Windows. So .6 × $70,000 Is $42,000 that's the lowest it could go for at sheriff's auction. It wasn't worth 70 or 42. I got it for $6500.
Good to know thanks for sharing your real world experience.
@Jeffery Waicak Thanks for the mention of the PMI.
I didn't think about the mortgage insurance. That probably does have something to do with why it goes to auction and then they sell it afterwards. The bank may need to show that they tried to get the total amount covered by PMI through a sale. After they have proved that they tried to get the amount and don't, then they can apply to get covered by the insurance and then sell it for more money later to cover any other losses. That is purely just me guessing at what happens.
I don't think they are less desirable, but I think there is some truth in that they have a little more to them. In a lot of cases, they are a little more involved because typically they aren't "turnkey" type of properties. From someone who has purchased REO properties in the past, I've seen easy ones to ones that take a lot of work.
The short answer is REO properties can be great investments, you just typically have to have a little more knowledge and comfort with what you're doing. The answer to "are they the scrap heap of the investment world?", absolutely not!
My first REO property was #6 I think, so I got my feet wet outside of the REO world first and I probably wouldn't recommend it being #1 unless you feel comfortable and maybe have had someone with experience help you out. But don't let that scare you, they truly aren't difficult.
Regarding: "What are some example instances where a property would go through the foreclosure and auction process and make it to the REO stage but still have potential to be a great investment opportunity?" This hapens when there are few buyer in the market and those who are have reached their capacit yto acquire. This kind of market existed in 2019-2011. These are called 'buyer's markets'.
I would suggest you do what I am doing and wait for a buyer's market when you can go in to a 'deal' confident you are getting a 'deal'. P.S. You may have to wait a few years. My 2 cents.@Brian Garrett This is a good question and has brought up lots of interesting responses from people who know a whole lot more than I do. I've only bought 5 properties (3 sfrs and 2 duplexes), and my first and third were courthouse auctions, and the second one, my very best deal, was an REO. The bank had bought it at auction, and they then sold it, after several tries, lowering the price slightly each time, through Homesearch.com
Our county's courthouse auctions are actually done online, and it's incredibly helpful to go online and see what happened with each property. Usually the bank's max bid is hidden before the auction, but you can go in and see what happened afterwards- at what price did the bank drop out. Sometimes the bank's max bid is posted well ahead of time, or just before the auction, and their max bid is clearly more than the house is worth, so no investor will bid on it, they will just wait for the bank to try to sell the house on the market through FNMA or other mechanisms.
In my area, because the market is super hot, the Fannie Mae properties aren't really very good deals, but sometimes there's an REO that shows up that is a bargain. In any case, I am still trying to figure it out, but I definitely think REOs are a great option. Good luck!
Brian G. REOs are a mix of outsized risk and outsized reward. It's outsized risk because you typically don't get to see inside the property so you don't know if it's decent condition or if someone has stripped all of the copper out of it. The reward comes in because people bid lower (or have a lower ceiling to be) because of that risk.
As for why auctions fail, it's because they don't meet the bank reserve. Let's say the property was bought for $100K, the bank is owed $70K, but it's in a rough area, has been unoccupied for months, and bidders can't get inside. They might normally be okay paying $80K for a $100K property but they have to risk-adjust and make their ceiling $60K. The property won't sell because the bank wants $70K. Or, more accurately, it won't sell for $60K today, it will just get listed again and again and again. If the investor ends up getting it for $60K and it turns out to be great inside then they can sell for $100K and make great money. If it's trashed, wiring has been yanked, holes in walls, mold, etc. they could break even or lose money. Just some random hypothetical examples.
Thanks Andrew that's a great example.
I don't think they are less desirable, but I think there is some truth in that they have a little more to them. In a lot of cases, they are a little more involved because typically they aren't "turnkey" type of properties. From someone who has purchased REO properties in the past, I've seen easy ones to ones that take a lot of work.
The short answer is REO properties can be great investments, you just typically have to have a little more knowledge and comfort with what you're doing. The answer to "are they the scrap heap of the investment world?", absolutely not!
My first REO property was #6 I think, so I got my feet wet outside of the REO world first and I probably wouldn't recommend it being #1 unless you feel comfortable and maybe have had someone with experience help you out. But don't let that scare you, they truly aren't difficult.
Great advice I agree with you. Thanks Justin.
Regarding: "What are some example instances where a property would go through the foreclosure and auction process and make it to the REO stage but still have potential to be a great investment opportunity?" This hapens when there are few buyer in the market and those who are have reached their capacit yto acquire. This kind of market existed in 2019-2011. These are called 'buyer's markets'.
I would suggest you do what I am doing and wait for a buyer's market when you can go in to a 'deal' confident you are getting a 'deal'.
P.S. You may have to wait a few years.
My 2 cents.
You're referring to REO's in particular or waiting for a buyers market in general?
@Brian Garrett This is a good question and has brought up lots of interesting responses from people who know a whole lot more than I do. I've only bought 5 properties (3 sfrs and 2 duplexes), and my first and third were courthouse auctions, and the second one, my very best deal, was an REO. The bank had bought it at auction, and they then sold it, after several tries, lowering the price slightly each time, through Homesearch.com
Our county's courthouse auctions are actually done online, and it's incredibly helpful to go online and see what happened with each property. Usually the bank's max bid is hidden before the auction, but you can go in and see what happened afterwards- at what price did the bank drop out. Sometimes the bank's max bid is posted well ahead of time, or just before the auction, and their max bid is clearly more than the house is worth, so no investor will bid on it, they will just wait for the bank to try to sell the house on the market through FNMA or other mechanisms.
In my area, because the market is super hot, the Fannie Mae properties aren't really very good deals, but sometimes there's an REO that shows up that is a bargain. In any case, I am still trying to figure it out, but I definitely think REOs are a great option. Good luck!
Yeah the market here is super hot and extremely competitive also. That's why I figured anything that has even a remote chance of turning a profit would be swallowed up right away.
Definitely some good deals in the REO realm. I bought an REO duplex last year - got offer accepted just days after it was opened to investor buyers. Paid $32k and it appraised for $58k when we did financing. We put about $4k into it and it cash flows about $600 a month now. I am looking at several other REOs right now too.
In my experience, REOs tend to scare off a lot of buyers because there isn't much info given about issues with the property like there would be from a typical seller, and you also are looking at the property without utilities on, using a flashlight, and I think the unknowns scare some people (non-investors) off.
Congrats on finding a great REO duplex. Was that right on the MLS?
@Brian Garrett - yes, MLS
@Erin K. Nice find Erin!
Regarding: "What are some example instances where a property would go through the foreclosure and auction process and make it to the REO stage but still have potential to be a great investment opportunity?" This hapens when there are few buyer in the market and those who are have reached their capacit yto acquire. This kind of market existed in 2019-2011. These are called 'buyer's markets'.
I would suggest you do what I am doing and wait for a buyer's market when you can go in to a 'deal' confident you are getting a 'deal'.
P.S. You may have to wait a few years.
My 2 cents.
You're referring to REO's in particular or waiting for a buyers market in general?
In general... in the last 20 or so years, I've learned to not fight the market, be it the real estate market or the stock market. While there are always opportunities, the odds of finding a good (or great) opportunity can be challenging in times like this when there are so many new players in sand box. Note that I am a contrarian investor in the real estate market and a momentum investor in the stock market, so consider that when reading my posts;)