When it comes to real estate investments, buyers are constantly reminded that location takes precedence over other considerations. They say that the location of a property determines the potential upside of the investment. That may very well be true, but seasoned investors like to point out that in real estate, you make the profit in the buying stage and not when it comes time to sell. This is a reference to the fact that when you buy at the right price, you won’t have to work too hard to hit the targeted rate of return on your investment. If you want to test this old adage, consider including bank-owned investment properties in your portfolio.
Understanding REOs
Real estate-owned properties, also known as REOs or bank-owned real estate are an offshoot of the foreclosure process. When property owners’ default on their mortgage payments, lenders initiate foreclosure proceedings to recoup their investment. In the pre-foreclosure stage, property owners may still have an option to bring their account up to date to retain ownership even after the Notice of Default is filed.
Depending on the state, the property may be officially foreclosed 60 to 90 days from the filing date of the Notice of Default. The property goes to foreclosure auction where the highest bidder who can comply with all the requirements of the deal becomes the new owner. Distressed properties that are not sold at auction fall into the category known as bank-owned properties.
These are some of the common reasons why foreclosed properties do not sell at auction:
- Lenders set the credit bid too high relative to market value.
- The minimum bid may be non-negotiable when lender wants to cover all their costs from the proceeds of the sale.
- Market conditions do not favor sellers especially when comparable properties are available at competitive prices.
- The condition of the property does not justify the asking price.
- The winning bidder backs out of the transaction.
Benefits of Buying Bank-owned Real Estate
The lender will prepare the REO property for sale to the public once it reverts to a bank-owned asset. The banks rarely undertake major rehab on the property, and REOs are sold in “as-is” condition. They may do the following:
- Ensure that occupants, whether tenants or foreclosed owners, have vacated the property.
- Clean the property, making note of needed repairs.
- Undertake basic repairs to secure the property, including boarding up or repairing broken windows and doors and removing nonfunctional appliances and household debris.
- Ensure that the property is accessible for inspection and open house tours.
- Clear any liens on the property.
REOs may be further along in the foreclosure process than properties that are offered at a foreclosure auction. You can use this information to your advantage to maximize the benefits of buying bank-owned real estate.
1. Clear title to the property.
Banks and other financing companies holding REO assets typically work on clearing the title before offering the property for sale. They will work with lenders of subordinating loans to facilitate write-offs. They will typically clear unpaid property taxes, title liens and other liens on the property to make sure that the title is unencumbered and ready for transfer to a new owner.
2. More flexible pricing.
Banks and mortgage lenders are not in the business of owning and managing non-liquid assets such as houses that may require a lot of resources to secure, maintain and market. At this stage of the process, banks are not interested in holding on to properties that do not generate income for them. As such, pricing for REOs may be more flexible, consistent with market trends and cognizant of renovation costs.
Why buy bank-owned properties when traditional listings are available in your preferred location? The opportunity to acquire real estate at below-market prices may be one of the top incentives to browse and explore REO listings. This may be the perfect situation to test the old adage mentioned above: Make your profit when you buy not when you sell. When you buy bank-owned investment properties at the right price, you won’t have to push too hard to ensure positive returns whether you plan to fix and flip or rehab and rent the house.
3. REOs are often available for inspection.
Bank-owned properties may be vacant and are usually reasonably clear of construction debris and other trash so that it is possible to schedule an inspection by a professional, when applicable. You will have a fair idea of the repairs and renovation involved to get the house ready to flip or rent based on the inspection report. With short sale and foreclosure properties, shortened inspection periods and cash-only conditions may be imposed.
4. Easier negotiations because homeowners are involved in the transaction.
It may be more difficult to finalize the sale on a property when homeowners are involved because they tend to have an emotional attachment that may slow down the process. Banks and lenders are concerned with the numbers only, and generating cash for a non-liquid asset on their books is a strong incentive to facilitate completion of the sale.
Why Buy Bank-owned Properties that are Cash-only Transactions?
Securing financing is one of the biggest setbacks to buying distressed properties. Sellers favor cash buyers because the sale closes quickly when the buyer does not have to wait for loan approval. However, there are options for real estate investors without ready cash.
- Personal loans from friends and family
- Cash infusion from a partner
- Construction loans/ home equity loans on a different property
- Retirement funds such as 401k and IRA withdrawals
Where to Find REO Listings
Auction.com is the largest online marketplace for distressed residential properties in different stages of foreclosure. The site currently counts at least 7,800 bank-owned properties among its thousands of listings for properties located all over the U.S. Browse the REO listings by entering your preferred location in the search bar and choosing bank-owned under the asset type menu. Listings are updated regularly, so make sure to search the listings often.
