Hi guys, Something came across my mind, I never really thought about it since I wasn't focus on buying REOs. I saw a property REO for $30K and the area is usually $60K-70K Say that this REO is move-in ready, no repairs needed. Would there be an instant equity of $35K if the property is worth $65K? Thanks!

Yes, and if there is $100,000 cash in the kitchen cabinets, equity is $135k. It's priced at $30k for a reason, not because the bank wants to give away $35k.

Instant equity is guru accounting, much like Enron accounting. Read the definition of "Market Value" if the sale meets the requirements for the definition, then the property sold at market value regardless of any claim as to making instant money. To increase the market value youneed to add value. After one year the value will then be established at it's current market value estimate. A lender may only be owed 30k on a 60k property, if it's worth 60k that's what they are required to at least try to get as the remainder is equity of the owner and they have rights to that equity. No bank doesn't mind about taking a loss, they all mind very much! :)

You said "say this house is move in ready". Its not. If it was, it would be priced higher. Banks aren't as dumb as we sometimes think. For the most part, they price their houses consistently with comps and condition. Now, where you can generate some equity is with the junky ones. If a house is move in ready (and no REO is EVER move in ready), it would be priced at retail. If it needs minor work, it starts at a price that considered the work. The bank hopes a owner-occupant will buy it with only a slight discount and then put in the work to bring it up to what they want. At some point, though, the amount of work exceeds what OO's want to do or can afford to do. Then the discount become larger and investors can get a good enough deal that they can either make a profit or generate some equity.

What the borrower owed is irrelevant once it gets to the REO stage. If you're not willing to do some rehab, don't bother with REOs. Seriously, they are ALWAYS going to require rehab, sometimes a lot. But always some. Something to keep in mind is that a property is always its own best comp. Once it sells for some price, that establishes a number that will haunt it and its neighbors into the future. If a property needs little or no work, and it sells for some price, that IS the value. Its not impossible that you could find a property a naive seller would let go for way under value, but that's rare. And if you buy a house and do little or nothing to it, its hard for an appraiser to justify a higher value.

LOL, have you looked up market value yet? Yes, it's 25K. Now, wait a year and if it appraises out at 45K you can claim that as you market value, but after one year. There are threads here about cashing out with rental propertis, tough to do with a bank, I wouldn't count on such equity financing anything any time soon. Use the income, save, etc. :)

wow Bill, thanks for the thorough post. I understand what you are saying. Maybe I should've mentioned this in my first post. I wanted to know about the equity in an REO is because I want to have it as a rental property and hoping to use the equity to purchase/down payment on a 2nd property. The bank listed it at $30K, we negotiated and the bank agreed to $25K. Is the market value $25K? So the only way to make equity on any property is to either do some work on the property?

As Will points out, and as I said, see the definition of market value, however, the definition includes parties having equaly or similar knowledge both dealing in thier own best interests, such will eliminate any property being sold under it's market value. While you may find different, slightly different definitions, the legal, accountingl and industry standards will all include the buyer and seller's ability to negotiate and neither party dealing from an unfair advantage. So, if a property meets the definition of market value, the price struck IS the market value, there is no instant equity. Now, as Will points out, it is possible to get a good or better deal due to your skills, you could be the slickest investor around and you might be dealing with the dumbest guy in banking and get a great deal, but you're not meeting the definition of market value either. I got what I thought was a heck of a deal on an REO property a few years ago, the bank examiners were doing an examination of the bank and were, I suppose, hitting the bank gigging them for holding the property, I was in the bank and the guy said we've had this too long and basically we need it gone. Well, great, but in that case there were other and perhaps undue influences (in the bank's mind) to dump the property and move on, so it's questionable that that transaction met the definition of market value. But, if you are in business you usually want to follow generally accepted accounting principles, no requirement to for a private entity, but acceptable practices flows through to other issues, like taxes. So, in keeping with this issue, assets acquired are booked at the lower of cost or market,which ever is less, which means that if you buy a house for 50K and the value is higher, you still book the sale at the lower amount, at 50K. When I said similar to Enron accounting, overstating asset values is an unetical and can be an illegal practice. Seems there was`a guru who claimed to have made millions in instant values and got hammered for such claims, basically inflating claims of amounts he had actually made. So, while it may sound good boasting how much some RE operator is making by buying at a price, how far they carry that claim and how it is used can boil your tail. As Will points out too, it's not impossible to get an REO that doesn't meet the market value definition and get a great deal, but even so, you can't claim any amount earned or made until you actually sell the property, then you can pound your chest and boast how much you really made without deceptions. :)

I never had a chance to buy a piece of property priced at half of the market value:)

Can an REO be in moving in condition? Yes, It can. I got one before in prime condition. I didn't do inspection; I didn't spend a penny to repair; I just handed it to management. Of course, you need to check on that.