Strategies for making money from a REO Home

REO vs. Foreclosure – Which is Better?

Many homeowners tend to confuse themselves between REO’s and foreclosures. REO results from an unsuccessful foreclosure. If a homeowner is unsuccessful in meeting his/her mortgage commitments, the bank forecloses a property. Following this, the bank attempts to sell the property via an auction. And, contrary to popular perception, foreclosures are not always easy to sell. For instance, I found some REO properties in Alexandria, VA which had been sitting on the market for more than a year and a half.

So, if the bank is unsuccessful in selling a foreclosed property, it ends up again on the bank’s book as a “REO” or “bank owned”. So does this mean that buying a REO is better than buying a foreclosure? Not always. Each option has its pros and cons.

For instance, if you buy a foreclosure, there is a possibility of renting out to the outgoing homeowners against whom foreclosure proceedings were initiated. If you were able to buy the foreclosure at an attractive price, you might be able to lower your ask and settle on a lower monthly rent which the homeowners might be able to afford. A win-win situation.

Reasons to Invest in a REO

Better prices

Because the bank is eager to clear their books, you are likely to get a killer bargain. In some cases, you can get a property by paying 20% lower than market price. And this is particularly true in a two mortgage situation. How so? Well, if the secondary lender does not make the necessary payments to the primary lender, foreclosure proceedings might be initiated against them. And once the secondary lender is out of the picture, the primary lender can afford to lower prices.

Lower interest rates

This is another possibility. Negotiate hard to get the best possible and lowest mortgage rates

Lower Down Payment

Again, since you are good negotiating position, you can get away by putting in a lower down payment

Clear Title

Because the property is bank owned, you do not have to worry about any title issues. You can be certain that the bank has done its due diligence and even taken care of tax liens, if any

REO vs. HUD homes

For real estate investors, buying a REO is easier than buying a HUD home. Owner occupants are given preference over investors as far as HUD homes are concerned. Moreover, HUD homes requires massive repairs are not in livable condition.

REO vs. Short Sale

Buying a REO is easier than buying a short sale. First of all, it is extremely difficult for the borrower to convince the bank to go for a short sale. Because the bank might have to forego the shortfall, they might not be too keen on a short sale. The borrower needs to come up with a carefully drafted “hardship letter” and other supporting documentation in order to convince the bank. Because of these complications some short sales might take as long as six months. Whereas, if you are buying a REO, you can expect a much faster response.

How to Buy a REO Home

We do not mean that buying a REO will be a cakewalk. You will face competition here as well, albeit less compared to buying a HUD home or a short sale. To increase your chances of winning the bidding war, we recommend making an all cash offer. Because no bank likes to sit on a property, they would like to close fast. And that’s why banks love all cash offers. It is a good idea to get pre-approved from the lender owning the REO in order to make an all cash offer.

You should make an offer taking into account the overall market conditions and competition. Has the bank been sitting on the property for a very long time? If yes, that means that offers are drying up. In this situation, if you are in a position to make an all-cash offer, remember that you have the upper hand. The bank will try to limit their losses through negotiations. But stay firm and you might get a great deal.

In a hot real estate market, you can also consider buying the property “as-is” to edge out competition.  However, always go for a thorough home inspection before making your decision. If there are any defects uncovered during the home inspection, you can lower your bid accordingly. Do not expect the bank to pay for these repairs. One advantage of buying a REO is easy access to the property which allows for thorough inspections.

Pro Tip – Use the bank’s title company even though their fees are higher than the rest. Why so? It is because if you use your own title company, you will be penalized for any delays. And dealing with a REO’s title can be a messy and long drawn affair. But, guess what? If you use the bank’s title company, you are not liable to pay any penalties.

Conclusion

Buying a REO home is a tricky process. You do not wish to underestimate repairs and be saddled with a poor property that is hard to sell. If you put in the right amount of research and avail expert guidance, you can buy a REO at the right price, flip it around and maybe sell or successfully rent it out. Make sure you tick all these boxes before foraying into REO investing.