What's Up With REO Investments?

Question

How popular are REO properties? It seems that I don't see them talked about as much as potential investments.

What are the drawbacks of these properties? What are some of the best ways to invest in them?

I see them as huge opportunities but not talked about a lot.

Tony Savage · Answer

Don't waste your valuable time searching for REO properties.  Those days of plentiful REO's are behind us.

Blake Anthony Carter · Answer

They are great investments of course but hard to come by

David Krulac · Answer

@Orlundo Hubbard  Great question, are they worth it.  After buying and selling over 1,000 properties for my own inventory, hundreds of which came from REOs,HUDs, VAs, Tax Sales and Sheriff Sales, I have some experience in this area.

1. On REOs, HUDs, VAs and other you can get inside but most of the time the utilities are shut off, and heat has been off for a long time at least one winter, in some cases more than one winter and are possible freeze damage to water pipes, hot water heat pipes and even boilers/hotwater heaters.  Additionally there is usially neglect, defferred maintenance and in some cases intentional damage caused by the departing owners/tenants.  One property we bought had four major roof leaks and blue tarps and cinder blocks on the roof.  Another property the owner removed all the copper wiring damaging walls and ciling in the process.  I have seen houses where the departing residents took kitchen cabinets, bathroom vanties, toilets, suspended ceiling and hardwood flooring when they left.  Then since the houses are empty for a period of time, they are subject to vandalism, theft, and sqautting.  I bought a property that I was told was empty for 1 year, when I suspect it was empty for 4 years actually.  It had hot water heat and there was freeze damage everywhere and the copper pipes were stolen.  I know the freeze damage happened first because if the copper pipe theft had happened first the freeze damage would be less extensive than it was.

You need to know what vlaues are before you start.  You need to know how to estimte repairs.  And without uitlities on you need to project the worst case, because there will be hidden damage.  In the Tax Sales and Sheriff Sales, its even worse as you usually can;t get inside, unless some other "investor" has already busted the door in.  On a ranch house, a 1 story house we tried to look in the windows but most windows had drapes or curtains and there was only one window that you could see inside and it looked ok.  We ended up getting the house, which had a finished basement, and a sump pump due to high water table.  The bank that foreclosued turned off the electric the punp stopped working and there was about 2-3 feet of water in the finiahed basement for about 3 years.  There was heavy black mold throughout the house and we ended up gutting down to the studs, replacing all drywall, all electric, new roof, most of plumbing, new kitchen, new bath and all new floor coverings.  We almost built a  new house. We've bought water, flood, fire, ice, mud, and mold damaged houses, none of them were much fun.

Some of the best properties that we bought were properties that we got well below ARV and were on the market for a long time.  We bought a house for less than 20% of ARV that had been on the market for more than 6 months.  Many other people looked at it and passed on it, which caused the lender to keep lowering their asking price, and even then we didn't offer asking price and started even lower than the price they finally accepted.  On another property REO, we were the first in to see it and the next days they shut down all showing due to covid, so nobody else was allowed to show.  We had already seen it, made an other and got the property.  So sometimes being the first in works out, other times being the last in works.  REOs always need wok, and many are overpriced for the condition and time being vacant.

The low interest rates and the mortgage forbearance has reduced the volume of foreclosued properties, but as time goes on there should be more REOs hiting the market.  It not as easy as buying property off the multilist, and there is usually no property disclosure, no warranties, and you're buying the property AS-IS, so it smore risky that MLS and buying with an agent, disclosure and warranties.

David Krulac

Bigger Pockets Podcast #82

Sherry McQuage · Answer

In NC, I can't find REO's that the lender wants to sell.  I have called lenders, and they say either they're renting them out, or they don't have any REO.

Since lenders can often be slow to respond, I stopped looking at them.  Most property owners that get into the start of foreclosure sell before it becomes REO...the internet makes it much easier for owners to sell instead of take the foreclosure route.