Just like there are many ways to peel a potato, there are many ways to find a deal. When some of us start out in the real estate investing game, we learn everything the hard way. I had purchased several investment properties before I learned about REOs, and although I didn’t pay full price, I didn’t buy them with as much of a discount as I would have liked to either. I learned about REOs from my experiences as a real estate agent, facilitating sales of bank owned properties to investors, working directly with the bank on the investor’s behalf. It wasn’t until I purchased my first bank owned property (and many others since) that I discovered the many advantages of buying bank REOs.
First and foremost, the term REO (or Real Estate Owned) usually refers to an asset that a bank or lien holder obtains either through a deed in lieu foreclosure process or at a foreclosure sale. If obtained at foreclosure sale, usually that indicates there either weren’t any bidders or there wasn’t a sufficient bid made that satisfied the bank or lien holder. This is where you, the investor, would come in. But why would you want to buy an REO over other types of properties?
5 Big Advantages REO Properties Offer to Real Estate Investors
Advantage #1: You can see what you’re buying.
As opposed to buying directly at a foreclosure sale, one advantage for an investor buying an REO is that you can get inside the property. Although some properties may be winterized or have utilities switched off (which you may be allowed to turn on or off at your own expense), purchasing a bank owned property allows you to visit the home and see the interior, so you can get a better idea of what you’re bidding on. If you know what to look for, this can prevent you from buying a home with alarming internal repairs, or it could even help you find a distressed property for the best price.
Advantage #2: You’ll usually get a clear title.
The second advantage is that you’ll usually get a clear title since usually all types of liens are extinguished and the taxes are brought current. So, unlike a property purchased at a sheriff sale, which may be wiped of junior liens, REOs are even free of government and municipal liens, as well as HOA (Home Owner Association) liens, giving the REO buyer more marketable title.
Advantage #3: You might receive discounted title insurance.
Another plus is that REO buyers may be able to receive discounted title insurance when purchasing bank owned property, especially if they can use the same title company as the REO seller for the new policy. Usually investors will receive a reissue rate, and this discount for reissuing the title insurance could be anywhere from half price to where the bank offers it up for free.
Advantage #4: You’ll likely receive a vacant/cleaned out property.
REO properties are usually priced for a quick sale, so most REOs are vacant and cleaned out. So again, unlike property purchased at a sheriff sale, you won’t have to deal with any unwanted tenants or furniture, junk, etc. left behind by the previous occupant. This makes for an easier transition for buyers who wish to flip, rent, or repair the property.
Advantage #5: Banks may be likely to make concessions.
Typically, REO properties are sold or listed with an REO broker with “as is” pricing to hopefully sell the property within 30 days. Although this may be rare, the longer the REO property is listed on the market, the more likely the bank or lien holder will be willing to make a concession for the buyer. For example, I’ve seen the bank reimburse for some treatments or repairs for things such as termites. I’ve even seen cases where the bank offered financing and terms for the buyer.
Although there are a variety of ways to find these properties, the most common include using the local MLS, talking to an REO listing agent, or simply driving around looking for boarded up houses (and then finding the owners through public records). Whatever the method, new REO buyers should understand that like any type of real estate, there are certainly times to buy and times not to buy. And sometimes purchasing REOs is a much different process for investors who are used to buying retail or at a foreclosure sale.
More Considerations Before Buying REOs
The first thing to understand is that it’s not the investor’s process; it’s the bank’s process. The bank generally prefers to sell to owner-occupants rather than investors, they prefer to deal in cash, and they usually require a larger down payment from investors. The bank is in it to make the most money possible, and it’s not uncommon for them to be slow to respond to bids in hopes of obtaining a better price. They love multiple offers, but it’s important to remember not to get lost in the bidding war.
Besides considering the advantages listed above, before you run out in search of REOs, follow the universal rule for all types of investments: Always run the numbers.
You only want to purchase or make a bid if it makes financial sense. I’ve personally found that REOs can be great deals when, for instance, they’ve been listed on the MLS for a long time, leaving the bank to be more flexible with their pricing. This is because the bank has most likely been sitting on this house for a while, and they’re just waiting for a reasonable offer.
I’ve also found some of my best REOs in areas where properties were selling left and right, the reason being that not many traditional buyers are paying attention to REOs since there are other deals to be had. And lastly, REOs can be great deals on the higher end of the spectrum, usually because they require such a large amount of cash up front that it scares away all of the little investors from trying.
So, what are you waiting for? Now that you know that there’s many a good deal in REOs out there, it’s time to get up and find them!
If I missed any tips or advantages, feel free to chime in and join the discussion on another great way to obtain property.
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