REOs not the way to go?

Question

Greatings all. So my wife and I have started a small real estate investment company here in Minneapolis. Our intentions are to buy and old REOs, rehab, and then refinance. I was shocked to find out, while reading through alot of the posts on this site that many are saying REOs are not the way to go. Can someone shed some light on this for me? Are there other types of properties we should be concentrating on?

Darien Chrysos · Answer

My group has purchased two and looking
for more.  They rehab and rent.

Are they sometimes a PAIN to deal with
in the purchase process?  You BET they
are! And that's a good thing. Keeps
inexperienced competition away who will
bid prices up unrealistically.

They are looking for more.
motto:  No Pain No Gain ...

Shane Wilson · Answer

80% of my acquistions are REO's and HUD's. They work fine for me. Any other way works too as long as the numbers always work.

There are plenty of ways to find deals. There's no single best way. Learn one method. Practice what you learn. Make some money. Learn another method or redo the same method. It doesn't matter what method you choose. It just matters that you are taking action and that your making money.

Jake Kucheck · Answer

An REO I bought last January the bank actually paid for 3% in closing costs and put in new paint and carpet.  The paint and carpet wasn't even part of the contract!  Clearly a case of one hand not knowing what the other hand is doing.

Joe Burdo · Answer

This is one of the reasons that REOs are typically easier and safer transactions. The bank clears all liens from the property when they take possession, which is not necessarily the case when you buy on the courthouse steps. If you don't do careful research on the auction sales you may find all sorts of liens that eat away at your profit as you clear them.

S Man · Answer

I have read that buying at the courthouse steps can also be problematic in terms of determining clear title ownership and researching other liens against the property (never mind the need to eventually evict the occupants).  What kind of research do you perform to make sure you know what you're getting into?

Chris Montgomery · Answer

We buy most of our houses at the courthouse steps.  In spite of that I'd say that it is not at all the easiest path.  It is probably the simplest transaction - if you are the high bidder you immediately hand the trustee cashiers checks for the full amount, and then Texas at least you typically get the trustee deed a few weeks later.  Minimal paperwork and no closing costs.  It does however take a tremendous amount of research and entails a larger amount of risk.  There is no option period, title insurance, etc so it's often a good place to start.

In most cases I find that individual REO properties are a much easier place to start.  In my experience they have generally been straightforward transactions.  You make the offer, wait on the counter and if it's accepted then you close in a standard fashion at a title company.   Basically a numbers game.   Some banks are slow to respond and most are fairly inflexible, but if you write clean offers that don't need closing costs and don't want exceptions then you will rarely have a problem.

The biggest problem I see with REOs is that that are too easy.  They are listed on the MLS and everyone has the same access to them.  Because there are no real barriers to entry, there are a lot of offers on anything that is a good deal.  In most other cases the banks have it priced too high for it to be a good deal.   The key to anything you want to flip is buying it cheap enough to have a margin for error and it's hard to find REOs that fit that criteria, at least in the Austin market.  We've purchased a few so far this year but it can be tough to build a consistent volume just doing reos.  It's definitely a nice supplement to the rest of the business though.

As far as rankings from  hard to eas, the best answer is probably that it depends.  It's really an issue of doing enough deals that fit your skillset.  Some people love marketing and talking to home owners.  For them preforeclores are probably a good fit.  Other people tend to like research and pursue the courthouse steps.  Others like neogitations and don't mind paperwork and do well in short sales.  The key to all of it is probably persistence - deals that are really good enough to make money on are out there, but they take a lot of work to find.

S Man · Answer

Christian, where would "foreclosures bought on courthouse auction steps" rate on your scale?  It's not a pre-foreclosure and it's not quite an REO at that stage either.

Just curious for your opinion as we will see thousands of properties hitting the courthouse auctions this August (in Georgia's Fulton and Dekalb counties alone)...

Christian Malesic · Answer

I have been to these auctions (sheriff's auctions in PA) prepared to buy, but the price was too steep for me.

So... I do not have a feel for it.  I hear they are pretty easy.  Maybe the easiest or, at least, toward the top of the list.

Any thoughts from others?

Tom C · Answer

I also think REO's are very simple. If I had my choice, that's I would deal with. Heck, sometimes they pay all the closing cost without even asking.. :)

Christian Malesic · Answer

Very eye-opening comment, Wheatie.

I would say REOs are a real pain, but then I have little experience with short sales and pre-foreclosures.

See, I believe REOs are much more complicated and involved than straight-forward property purchases.

Based on my own experience and posts from BiggerPockets, let us put it this way:

(from easiest to hardest)

Normal purchases
Wholesales
REOs
Pre-foreclosures
Short Sales