When seeking out investment opportunities, it’s important to leave no stone unturned. Buying properties that are dubbed real estate-owned (REO) properties or real estate-owned properties is one avenue worth considering. Investing in real estate-owned properties offers certain advantages but it’s essential that investors understand the risks as well.
What Are Real Estate Owned (REO) Properties?
In the simplest terms, the real estate-owned property is any commercial or residential property that has been repossessed by a bank or mortgage lender. The process by which a property becomes real estate owned (REO) is fairly straightforward. When a property owner fails to meet their mortgage obligations. The lender can initiate foreclosure proceedings to recoup the loss on the investment. If the property does not sell at auction or the lender is the highest bidder, the lender assumes ownership. Once a property becomes real estate owned, the bank or mortgage company will prepare the property for sale and put it on the market.
Why Real Estate Owned (REO)Properties Are an Attractive Option?
If that were the case, you would have a bargaining chip of sorts when it comes to negotiating things like the final purchase price and closing costs. In some ways, buying directly from the lender can be easier because it eliminates certain problems that can arise when a homeowner or commercial property owner is involved. For example, with a bank-owned home, the buyer would not have to be concerned about emotions directing the negotiations.
It’s also possible to pay less for a real estate-owned property than you would for a property that’s seller-owned. These properties may be priced at or below market value. Which is a plus for buyers who are hoping to get a deal.
Finding Real Estate Owned (REO) Properties for Sale
Larger banks often have an entire department dedicated to the sale of real estate-owned (REO) properties. They may feature listings on their website. With a smaller bank, it may be necessary to contact a local branch to determine whether any properties are available and who oversees sales. Enlisting the help of a real estate agent can also be useful in pinpointing real estate-owned (REO) opportunities. Look for an agent who specializes in dealing with these types of properties in the market segment that you’re interested in.
Buying a Real Estate Owned (REO) Property
Finding a suitable real estate-owned property is the smallest hurdle buyers must overcome. The next and more challenging phase is negotiating the purchase of one of these properties. There are several things buyers must be aware of going into the negotiation process. First, individual lenders can set their own guidelines for the sale of real estate-owned (REO) properties. For instance, some lenders may require a larger deposit of earnest money or stipulate that the deposit be nonrefundable.
Next, real estate-owned properties are usually sold “as is”. This means the buyer is responsible for covering the cost of any necessary repairs or upgrades. An inspection and appraisal are part of the buying process but these don’t occur until after an offer has been made. It’s a wise move to include a clause in the offer allowing for retraction if the inspection uncovers a major structural issue. When formulating an offer, buyers should use the property’s fair market value as a guideline. Depending on how much competition there is for the property, the starting bid may be the same as the lender’s asking price. If there are no other interested buyers, it may be possible to negotiate a discount but be wary of undercutting the price too much.
One final consideration to keep in mind is financing. Buyers who are not paying with cash will need to get pre-approval for a loan prior to making an offer. When a property requires substantial work. It may become more difficult to obtain a loan without offering a larger down payment.
Selling Real Estate Owned (REO) Properties
While some buyers purchase real estate-owned properties with the intention of living in the home. Others see it purely as an investment opportunity. Investors who hope to turn a profit by reselling the property will first need to make it as attractive as possible to buyers. From a cosmetic standpoint, that may involve completing renovations on the interior or exterior. Which is something you’d need to budget carefully for. In terms of ensuring the property is physically sound, that would require addressing any issues raised during the inspection process.
Once the property is ready, the next step is bringing in a real estate agent to help with the sale. The real estate agent can offer insight into how to set the sale price and what the best strategies are for marketing the property.
Risk and Rewards of REO Properties for Investors
Investing in a real estate-owned property offers several benefits for investors compared to other types of real estate. In most cases, for example, the lender will take steps to clear any tax debts, liens, or title issues connected to the property before offering it for sale so there are fewer obstacles to buying. The lender is also responsible for removing any occupants of the property prior to the sale. That applies to homeowners who may be resistant to vacating a residential property or tenants of a commercial property. That allows the investor to avoid the time and expense associated with having to initiate eviction proceedings.
Again, perhaps the strongest incentive for investors is the potential to earn a decent return with one of these properties. A lower asking price can positively impact the property’s profitability once the investor is ready to sell it or rent it out. In terms of the drawbacks, there are some pitfalls to keep in mind beginning with the property’s condition. If the inspection fails to reveal any major damage that isn’t discovered until after the purchase is complete. The investor is responsible for addressing it. Having to spend additional money to get the property ready for resale or leasing can eat into any profits you’re anticipating.
It’s also possible that issues with the title may not become apparent until after the fact. Even if a title search was performed prior to the purchase. In that scenario, the investor would need to have an owner’s title insurance policy in place to shield them from any liability stemming from problems with the title. Lastly, there are no guarantees as to how well the property will perform. Even investors who have thoroughly researched the market may miss the target when gauging how much they’ll be able to lease or resell the property for. If the property lags behind expectations. It’s possible that you could see your profit margin shrink or in the worst-case scenario, disappear entirely.