When a forcloseure property goes through the foreclosure process and doesn’t sell at auction, it is commonly refered to as an REO (Real Estate Owned) property. The bank then will let a real estate agency list the property on the MLS in a normal real estate sales process.
Offers that are submitted are then reviewed by the banks Asset Managers. These Asset Managers have the authority to reject or accept offers on the banks REO properties. If the bank accepts an offer, contracts are signed and the property will go through the standard closing process.
Pros of Buying REO Properties
- Good Deals – Many investors focus mainly on REOs because they are priced so low. The banks are actually willing to lose some money just to get rid of the property and get most of their money back.
- Less Negotiating – For those investors who don’t like to negotiate, buying an REO might be the perfect solution. Just submit an offer and wait for the bank to accept or reject it. Some investors like to negotiate. Others don’t like to ask homeowners if they will sell their house for some low-ball price.
- Ability to Inspect – Buyers are granted access to walk the property as much as they want before, during, and after submitting an offer. Buyers can fully inspect a house before even getting into the due diligence period. Having access is great for bring in your contractors to get estimates so that you can really crunch the numbers in your deal analysis.
- Excess Inventory – Foreclosures happen all the time in all markets and geographic locations. New REO listing are constantly coming onto the MLS. By using the MLS they are also easy to find.
- Standard Buying Process – The buying process is pretty much the same as any other type of property. You may have to endure some minor delays from the bank but it should take no longer than 8 weeks to close.
Cons of Buying REO Properties
- Less Negotiation – Although there are benefits for those that don’t like to negotiate, there are drawbacks for those that do. Getting creative with your tactics is not possible with REOs. The bank strictly looks at the numbers and the terms, that’s it.
- More Earnest Money – When you get a property under contract, you must prove that you are a serious buyer by providing the seller with an “earnest money deposit”. This money is refundable if you don’t buy the property as long as you don’t break the terms of the contract. If you do break the terms of the contract, the money is kept by the seller. Once a house is purchased the money goes towards the down payment.
- One-Sided Contract Terms – The banks will write out the terms of the contract to favor the bank. If they can’t close on schedule you have to wait around for them or something stupid. Just be aware of the contract and what the terms are.
- Missed Deadlines – As I noted the one-sided contracts, the banks don’t always hit their agreed upon deadlines. It will take anywhere from 3-8 weeks from the time the contract is signed to the time you close. In contrast, this might be a good thing. Especially if you need to get everything organized for the upcoming rehab and to get your finances in order.
- Deed Restrictions – Often times if you buy an REO property from a government loan agency (Fannie Mae and Freddie Mac) they will require you to agree to a selling restriction. The selling restriction will say something like you cannot sell the property within 90 days of the purchase for more than 20% above the purchase price.
In conclusion, REO foreclosures are a great to target if you are a first time investor. You should still run the numbers on these properties just as you would on any other types of properties. Deed restrictions will only be problematic for house flippers who can flip fast (under 90 days) or wholesalers. All in all REO properties have plenty of deal potential as an investment strategy.