How To Buy REO Properties | The Simple Facts

Buying REO Properties can be a great outlet for house flippers.

In the business of house flipping, often times expert investors will seek out and purchase many different types of properties. While buying homes straight from the previous homeowner can be great, if that is your only means of finding a property, you might be limiting yourself.

To really thrive in this business, you want to consider diversifying the types of properties you buy. Some popular means of buying short sales, and buying foreclosed properties. However, what many people often overlook is something called an REO property.

REOs are essentially the third piece in the foreclosure family. The first, buying a short sale, is to buy a property from the homeowner before is foreclosed. The second option is to buy a property after it has been foreclosed, usually from a foreclosure auction. The last option is to buy an REO property. An REO, or “real estate owned” property, is a home that fails to sell in a foreclosure auction.

Why Buy REOs?

REO properties can be great investments because they often sell at below market value. Moreover, they will sell below the asking price at the foreclosure auction.

What happens is, if a property fails to sell at a foreclosure auction, the lender, which is typically a bank, keeps possession of the house. However, the bank does not want to hold on to the property because they are loosing money every day that they are in possession of it. Costs like homeowners insurance, property taxes, utilities, and maintenance are all things that the lender is responsible for.

Because of this, the lender wants to get the property off its hands as quickly as possible. They will often sell the house for an incredibly low price for this very reason.

When Is Buying REO Properties A Good Idea?

Buying these properties is the often the cheapest way to invest in real estate. However, you must make sure you do it at the right time. If the market is too competitive, you could end up paying far too much for your property.

What happens in this case is that the bank might increase their starting offer if their local market suggests competitiveness. Perhaps the investors just simply did not see the listing for the foreclosure auction but are still interested in the property.

While being the sole potential buyer is ideal, you will often not find yourself in this position. If you are vying against two or three other investors, you might still be able to buy the property at a reasonable price. However, if there are a greater number of bidders you might want to let the property go and live to fight another day. When caught in a bidding war with ten other investors, the victor of the property will often be the person ignorant enough to spend too much to profit.

Never let emotion get the best of you when purchasing real estate. Make sure you stick to the 70% ARV Rule. By this we mean that you should never purchase a property for more than 70% of the after repair value of a property. To find out what the ARV of a particular house is, ask a reliable real estate broker in your area.

How To Buy

If you are competing against other investors, you obviously want your offer to be accepted above theirs. You will want to make your offer the most appealing to the lender. There are three keys to presenting yourself this way: speed, simplicity, and definitiveness.

Speed

As stated before, the banks want to get rid of the property as quickly as possible. Being the first to make an offer on the home is a great way to set the bar for the other investors.

Essentially, every part of your buying process should happen quickly. For example, you should get the house inspected quicker than any other potential buyers. Some real estate experts even suggest that you waive your right to get the house inspected all together. However, doing this can be risky because there could be substantial damages to the house that you might not see on first glance. Remember, the banks do not know the condition of the properties they own.

Moving fast when dealing with REO properties can make you appear to be a more serious investor to the lender. In this case, slow and steady does not win the race. By moving with immediacy, you might even be able to finalize a deal with the lender before your competitors become interested.

Simplicity

A great way to avoid this is by paying in cash rather than finance. Cash is simpler than finance because there are fewer logistical problems that could occur. The transaction is from A to B with nobody in between. Not everyone can afford to pay out of pocket, but if at all possible, cash is the better option. Some banks won’t accept a mortgage option at all.

Definitiveness

One of the most important considerations that a bank gives to your offer is its finality. If you appear unconfident in your ability or willingness to purchase the property, even if your offer is the highest, the lender might favor one of your competitors instead.

An easy way to back up your offer is to get a proof of funds letter from your own bank. By proving definitively that you can put your money where your mouth is and do indeed have the cash to pay for the property, you become a more appealing candidate in the seller’s eyes. If you are not entirely paying for the property yourself, make sure you get your partner or partners to get a proof of funds letter. Or maybe you share a mutual fund, and you could do the very same thing.