Investor · Short Gap, WV · Member since 2016 · 160 posts · 38 votes
Hey all, I have a simple question.
I want to purchase an REO as an investment property but I'm not sure of the process. Do I need to be sure to tell the bank that it's going to be a rental or does it matter? I plan on putting the 20% down on it to acquire it. Please answer for both REO's and normal houses on the market.
I live in a small town and most of the renters will most likely be college students. I have good credit score and a couple thousand to put down. I haven't bought a house for myself yet so the actual buying property process confuses me just a tad for now.
And please tell me if an REO is much different than a traditional house on the market in terms of the buying process. Most of the houses I look at aren't bank owned but this one happens to be.
Thanks guys and gals,
-Dakoda
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
10y
Originally posted by @Account Closed:
@Dakoda Spencer Banks sell REOs to cash buyers and never heard of a bank financing an REO, and you will need to make your offer through the realtor the bank is using. Good luck.
I have seen the bank that owned the REO give a buyer the loan to buy an REO exactly once. It was a smaller local bank that did portfolio loans, the loan that was foreclosed was one of their portfolio loans, the building had six units (so no conventional loan products for this), and the buyer was willing to pay more if they funded it. So basically the bank turned their non-performing loan into a performing loan by doing that. It sure seems to make sense for a banks to do that, but in spite of that it does not appear to be so common ...
Investor · Short Gap, WV · Member since 2016 · 160 posts · 38 votes
10y
John Anderson Thanks for the comment! I told you it was a simple question! I feel a little silly asking it now that I know that but that's okay.
If I am able to put 20% down, can I buy a property "as is" through a bank?
Real Estate Investor · Lake Havasu City, AZ · Member since 2015 · 72 posts · 60 votes
10y
@Dakoda Spencer REO's are the nearly exactly the same as any other house on the market, it just happens to be owned by a bank. Your real estate agent should be able to guide you through this whole process. If they can't, get a new agent.
Investor · Short Gap, WV · Member since 2016 · 160 posts · 38 votes
10y
Thanks Waylon Gates ! Does it make it different if I do or do not tell them it's going to be an investment property or not as long as I can put 20% down?
Real Estate Investor · Lake Havasu City, AZ · Member since 2015 · 72 posts · 60 votes
10y
@Dakoda Spencer I have seen some banks have a waiting period for non owner occupants, but other than than I don't know why you should need to tell the seller what your intentions are. Now your lender will need to know, it is part of the underwriting and you sign a document promising that you are doing what you told them. ie. don't tell them that you are buying a primary residence and then never live in it and plan on renting it, that is called mortgage fraud. People do it all the time, but it makes me sick and is the sign of a non-professional real estate investor.
Investor · Short Gap, WV · Member since 2016 · 160 posts · 38 votes
10y
Waylon Gates , I guess that's my real question. What all changes when I tell my lender that I want to buy a house as a rental instead of my primary residence?
Real Estate Investor · Lake Havasu City, AZ · Member since 2015 · 72 posts · 60 votes
10y
That is a question for your lender. There are many different programs and interpretations of the government requirements for federally backed loans. They are going to be looking for reserves, history, value of the house, and depending on if your new at this or not they may ask for history of other rentals and who manages them. There are honestly a large about of variables, many times from one lender to another things can vary widely. The lender that you work with will be able to and also want to help you navigate this. If they seem like you are bothering them, get the hint and find a new lender. You need a strong team member that can help you achieve your goals.
Investor · Short Gap, WV · Member since 2016 · 160 posts · 38 votes
10y
Dustin Verley , I think what Waylon meant was it would be a fraud if I told the bank that it would be my primary residence but then turned around and make it a rental property.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@Dakoda Spencer, "cash buyer" just means that you have the funds guaranteed for the closing date. None of this "er, my Bank hasn't finally approved my loan yet" stuff, when the Contract stipulates NO financial contingency. But the Bank shouldn't care if that "cash" is (pre-)borrowed.
Real Estate Investor · Lake Havasu City, AZ · Member since 2015 · 72 posts · 60 votes
10y
@Dustin Verley When you fill out the mortgage application and also when you sign the loan docs there will be a line that says that you are going to use the house as a primary residence. If you say that you are going to do that and then don't that is called fraud. Keep in mind this is a Federal Offense and not worth it. Successful investors are not limited to this method of blurring the line in order to be an 'Investor.' Again I see it happen fairly often and it doesn't seem to show up on anyones radar, but if your a serious investor and you want to do more than a handful of rentals you will need to learn the right way to do it eventually anyway, so might as well start on the first one and then you will be better prepared to go big.
Waylon Gates , I guess that's my real question. What all changes when I tell my lender that I want to buy a house as a rental instead of my primary residence?
I've often found it strange that Banks have their interest rate "dial" set at different levels depending on whether the same property is for your primary, or for investment. Especially when one month, their rules will have the dial set higher for investment then the next month new customers might get the dial set lower BECAUSE it's for investment. [Regardless, do NOT lie about your intention!]
I've concluded: they'll set the dial as high as they can - because they can - no other reason!...
Real Estate Investor · Lake Havasu City, AZ · Member since 2015 · 72 posts · 60 votes
10y
@Dakoda Spencer I would talk to a loan officer at the bank, I would also mention that I have found that a mortgage broker often has access to more programs and may be able to better assist you. There is also a compensation difference between typical big bank loan officers and mortgage brokers, generally the mortgage broker makes more money on your loan and so they are normally more committed to helping (since they stand to lose more if the loan doesn't go through). The banks on the other hand sometimes can get you a little better rate, like with anything shop around a little, and ask questions.
@Dustin Verley Subject to deals are tricky all together. There are a lot of issues here, if you want to get into it I would be happy to, but that should probably be a whole thread of it's own. Here is the bottom line: most modern mortgages have a "Due on Sale" clause that would technically give the banks he right to accelerate the note and call it all due. That is what the back and white says. Now there is a whole bunch of between the lines that we could go into.
@EJ Concepcion This depends entirely on the verbiage in the note and Mortgage or Deed of Trust. There are some home loans that I have seen the dictate that the home is to be used as a primary personal residence only.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
10y
Originally posted by @Account Closed:
@Dakoda Spencer Banks sell REOs to cash buyers and never heard of a bank financing an REO, and you will need to make your offer through the realtor the bank is using. Good luck.
I have seen the bank that owned the REO give a buyer the loan to buy an REO exactly once. It was a smaller local bank that did portfolio loans, the loan that was foreclosed was one of their portfolio loans, the building had six units (so no conventional loan products for this), and the buyer was willing to pay more if they funded it. So basically the bank turned their non-performing loan into a performing loan by doing that. It sure seems to make sense for a banks to do that, but in spite of that it does not appear to be so common ...
Real Estate Investor · Lake Havasu City, AZ · Member since 2015 · 72 posts · 60 votes
10y
REO is a term that loosely identifies foreclosed property that is owned by the 'bank' or in other words a house that was foreclosed on. Think outside of the box a little and don't look for reasons to not write offers.
an example: if the foreclosing 'bank' is actually a small investment group they may be willing to just sell the house with another mortgage and start their cashflow again. No one dictates to this level of specificity what can be marked as REO. So it could be literally anyone.
Again I would say just write the offer, even if that includes asking for financing. Maybe a seller didn't think they wanted to provide financing, but once they see your terms maybe it would be perfect for them.
Remember what the answer is if you don't ask... N O. If you ask the worst that could happen is the same as not asking at all, or on the other hand it could land you an amazing deal.
Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
9y
@Dakoda Spencer as mentioned a bit earlier, REO does not mean that you have to purchase in cash/etc. Most of the comments in regard to cash often have to do with the condition of the property (i.e. it is not suitable for a conventional loan). Everyone always forgets, but no matter how tight the competition is, you are in the driver's seat as a buyer because you get to decide how you structure your offer. Now, you might not get anything if you aren't trying to make it competitive, but you can DEFINITELY buy at least some REO's utilizing a mortgage and without having to write non-contingent offers (you just possibly might not be as competitive). I also should note that some do require it to be cash and non-contingent. For those deals, be very careful or you might lose your shirt.
Just remember that REO does not mean "free money" for the buyer. You might be better off just negotiating the heck out of a traditional sale if your agent is up to it.
REO just means that the seller is a bank. There are just certain things banks typically prefer (i.e. cash offers) but it all comes down to what the bank (seller) wants and what you (buyer) can offer.
When you are financing a deal (putting 20% down, borrowing 80%), you would have to tell the lender if it is for primary residence or investment property because terms are different. For example, we are a private lender and do not finance any primary residence, only investment properties. So if you came to us asking for financing for your "primary residence" then we won't be able to finance the deal.
You also need to indicate primary residence/investment property for tax reasons.
Keep in mind that people's situation, strategies can change after the fact. Hence, best thing to do is to mark what your initial intention of purchase is.
Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
9y
IF your lender was to deem the property safe and livable from the day you purchased they would finance.
IF YOU need to go make repairs to get it to a livable condition then your not getting it financed through traditional banking even with 20% down. You will need all cash.
I called a local bank and asked what they would need to finance an investment property. The gentleman simply said that I need 25% down, my last two years of tax reports, and some proof that I make money. When I continued to ask if the process would be any different for an REO, he simply said that "as long as the appraisal is adequate, it won't be a problem." What does that mean?