Banks are in the business of lending money, not owning, managing, or selling real estate. However, oftentimes a bank is forced to foreclose on an investment, and a property reverts from an investment to Real Estate Owned, or REO.
Real estate investors can purchase REO properties from banks for less than the full market value of the property, but in most cases, REO properties are sold by lenders at or just below market value. A smart investor will have a strong strategic plan for bidding on and financing a bank-owned property to get the best value.
Bidding on REO property
Even though banks do not want to hold and manage real estate properties, there is a wide misconception that banks want to ‘dump’ REO properties at far below the market value simply to get if off the books. Closer to the truth is the fact that a REO property is not considered a liability, and banks will want to get full or near market value for their asset.
If an investor makes an offer on a REO property lower than the bank’s calculated full market value, the bank will probably make a counter-offer closer to the market value at which they want to sell. An important thing for investors to remember is that banks do want to sell their REO properties as quickly as possible, so patience and persistent bidding is the key for a potential investor to get a good deal. But also remember that a bank is looking after their own best interests – not yours.
Understand that REO is “as is” property
Banks will usually sell their REO properties in “as is” condition, meaning if there are any renovations or repairs needed in order to qualify for traditional financing, a bank will not perform the repairs. They may, however, offer a credit on the sale price for the deferred maintenance of a property.
Investors should analyze a property carefully and have thorough inspections performed by licensed inspection firms. A proper inspection will reveal items that an investor will need to consider improving before the property can be achieve full resale or rentable value.
If a property with numerous defects does not qualify for a traditional mortgage from a bank or other lender, a real estate investor will need an alternate plan to finance the property. The investor should form a plan for repairs and renovations and could work with partners to invest money in the fix up project. Hard money lenders may also be a source of short-term financing.
Enjoy favorable terms
An investor will often reap favorable sale terms from a bank REO property. The properties are usually clear of any prior liens. Additionally, a bank may offer financing to an investor will favorable terms, such as low down payment or low interest rate.
Swift closings can also be a great benefit since the title will be owned free and clear by the bank.
Benefits of buying REO
As previously mentioned, a REO home is generally free of all liens from prior lenders and contractors. Having a home for sale free and clear offers a safe investment and quicker closing times.
A REO property will also be vacant and ready for an investor to occupy or begin renovations immediately after the sale. Any owners or tenants will already have been evicted prior to the final foreclosure.
REO properties can be a great investment – as long as an investor is savvy about purchase strategies. Knowing the condition of the property and bank REO selling procedures is an asset to the investor. With a little experience, a real estate investor can reap many financial rewards with a niche in REO properties.