You Bought an REO Now What?

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Let me set the stage for you.  You are a buy and hold investor.  You have done all the work required to learn your market and make a great purchase. The escrow just closed and the REO property is now yours.

You have a lot to do and you need to know where to start.

Each REO property offers its own challenges. I will highlight how I would run the project start to finish as a buy and hold investor:

Prepping Your REO For The Tenant

The first thing I would do is perform the trash out of the property and make several dump runs, as it is amazing how much trash is often inside REOs.

The next thing I would do is perform a nice clean-up of the front yard and put up the for rent sign.  Now by nice clean-up I mean more than just cutting the weeds.  I would mow the grass, trim trees, prune bushes and make sure at least the front of the house looks clean from the street.  

Why start outside when the inside is a wreck? 

My belief is renters rent with their eyes first and thus you have to make them stop the car and get out of the car to look at the property. 

Many times I create cute front porches, or put up white picket fences before I do anything inside.  I want to get as many people out of their car and looking at the property before I am finished with the rehab.  This gives me the best chance of renting it before I am done with the remodel which is my goal.

Once the front yard is done I would at least make sure the back yard is trimmed because people love yards. 

The only exception to this rule is if we have broken windows or the house has holes in the roof.  I want to make sure the unit is secure and water tight first and foremost.  The good news is I can typically get both teams working at the same time if I bought an REO with roof damage,because a roofing team is not going to be the same team as the yard crew.

Where to Focus Inside?

Once the outside is done and people are stopping to see the house I will focus on the bathrooms and kitchens first.  Based on the quality of the property I would scale my repairs.  I would make sure the kitchen and baths look very clean and offer natural colors.  Sometimes I put in new linoleum and sometimes I use tile — I base the decision on the typical rental unit in the area. 

Many times I will paint the cabinets and just put new hardware on the doors and drawers, which really make the units stand out.

After tackling the kitchens and baths I will go to the rest of the house and make sure everything is working order and I will then paint the entire inside.  This does a couple of things for me.  First, houses looks a lot better with a fresh coat of paint.  Second, most REO’s have been vacant for a long time and a fresh coat of paint can actually make the house smell better.

My final touches would be putting in new flooring.  Every REO I have bought has gotten new carpet as the old ones have carried “interesting” smells. 

With all that complete, you have a newly remodeled REO. 

Ultimately, I start all my REOs on the outside and I place my for rent sign up once the front of the house is all cleaned up — not after the remodel is complete.  Then I tackle the kitchen and the baths and wrap up by focusing on the rest of the house. 
By doing it this way I believe I will get the most potential tenants stopping by and looking at my rental home during the remodel, which gives me the best chance of renting it quickly.

Good Investing

Photo: Bart Everson

About Author

Michael Zuber is an active buy-and-hold real estate investor who still has a full-time job. Michael is not an agent or broker, and simply uses the internet and agent relationships to drive his business. He currently averages at least one deal a month and has developed laser focus on his 5 step process.

13 Comments

  1. As someone who has bought numerous REOs and also represented buyers in the purchase of REOs, I can honestly say that the there are two major differences:

    1) You sign an as-as addendum, and often are compelled to use the bank’s title company (which is fine, since they’ll offer to pay for your title policy/search)

    2) The property has not been lived in for sometime, so expect broken water lines, cracked sewer lines, etc. Plumbing is most often the biggest hurdle. Go into an REO with the expectation that you are spending $5,000 to do a sewer line dig up and $1500 to replace the water line from the curb. If you have that expectation, then when you don’t have to tackle those issues, all the better.

    Other than the above, the purchase of an REO is just like any other property, and so too should be your renovation / hold / flip plan.

  2. Michael – I think the most important part of this post is the advice to get the exteriors/curb appeal completed first and foremost. So many people wait and take care of those things last, leading to extra days on the market. Great tip!

      • Michael,
        Years ago I worked as a laborer for a homebuilder. In his developements he would always finish the outside of the house first, including ALL the landscaping, even the flowers. The house looked completely finished from the ouside but when you walked through the front door there was just bare studs! He pre-sold a lot of houses that way!

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