Looking for profitable investment deals? REO properties have become more popular candidates for fix & flip opportunities during times when the seller’s market is so competitive. But before breaking out that hard money loan application you should first know what you’re getting into and how you can snag an REO property as quickly as possible.
To purchase an REO quickly you should first examine the history and comps, get a Proof of Funds letter, research the listing agent and their history, inspect the property quickly, and remove concessions.
That’s a quick overview, I know. So let’s get into talking more about what an REO is, the pros and cons of investing in REOs, and my tips for locking that property in as quickly as you can.
What is a Real Estate Owned (REO) Property?
A real estate-owned (REO) property is a property that is either owned by a bank or government agency. REOs are typically the designation given to houses that didn’t sell at auction after going through a foreclosure. These properties can be great investments because they are typically cheaper to buy than properties that are available for sale but come along with some caveats.
What’s So Great About Investing in REO Properties?
There are a few reasons why investing in REO properties can be a great decision.
- Many REO properties are overall in good condition and can be quickly and easily renovated or updated.
- They’re often cheaper than other types of properties since the banks want to get them out of their inventory.
- They can often be acquired quickly and without much hassle, if you get the right person at the bank.
- REOs don’t come with title liens or outstanding taxes. These are usually covered by the bank looking to sell the property.
What are the Downsides of Investing in REO Properties?
It all sounds too good to be true, right? So what’s the catch to these REO houses? Well, there are several potential downsides to investing in REO properties.
- It can be difficult to identify quality REO properties. Many sellers may not want to list their properties as REO, or they may not be aware of the opportunities that are available. It can be helpful to do your research and look for properties that have recently been sold or are in foreclosure. Additionally, it can be helpful to have connections in the real estate community. Some brokers may be willing to help you find quality properties, and others may be willing to provide you with tips on how to identify them.
- It can take a long time to negotiate and close a deal on an REO property. This is mostly because a bank owns the property and has a lot of things to deal with besides your offer. Expect to play the waiting game.
- REO properties may be more expensive than others and they may not be in the best neighborhoods. Your purchase price may feel like a steal but if you’re not diligent you could end up spending tens of thousands of dollars just getting the place rehabbed. Also, painting with broad strokes here, but generally, REOs aren’t in the most desirable neighborhoods. If they were, they most likely would’ve sold at auction.
- REOs are sold as-is. If the bank acquired it through a nasty foreclosure and eviction you might end up with a hefty rehab bill to get the property up to sellable condition. However, you should be able to get an inspection before closing on the home.
- REO properties may not be worth as much as they once were, due to changes in the economy or the market for real estate. That’s why it’s important to look at comps before investing to see if you’ve really found a diamond in the rough or just another money pit.
How to Lock in an REO Property Quickly
Examine the Property History and Comparables
In real estate, a property is only worth what someone is willing to pay for it. First, take a look at the last three months of comparables (recently-sold similar homes in the neighborhood). Then, once you obtain these selling prices, have your agent get you the lender’s purchase price on the Trustee’s Deed or Sheriff’s Deed. Finally, compare that price to the price which the lender lists.
Assuming the property is under-priced, the lender will accept an offer that is made between the original mortgage balance and the foreclosure sales price. Narrowing down a competitive property purchase price gives you a significant edge to steal the property out from under the noses of your competition.
Submit a “Proof of Funds” Letter
A Proof of Funds Letter shows the lender you mean business and can do business with them right away. These letters show you already have funding set aside for this deal. Therefore, you speed up and simplify the loan process. Lenders definitely want to work with investors who are already pre-qualified or approved for a loan.
Check the Listing Agent’s Sales History
This method kills two birds with one stone. First of all, the majority of REO agents usually work for one or two banks/lenders. Some of them list REOs exclusively. This gives you an incredible pool of eligible properties, significantly reducing your search time. Second, these agents deal in volume and usually apply the same pricing principles to all of their REO listings.
Look up the listing agent in the MLS and check out their last 3-6 months of listings. You’ll see their history of list-price to sales-price ratios. If you see a trend in those listings, such as 3% over list price, further refine your offer to 4%, making it more competitive.
Speed Up the Inspections
Like the Proof of Funds Letters, this method speaks volumes regarding your borrowing credibility. The more quickly you can get things done, the more lenders will want to work with you.
Shortening the inspection process doesn’t mean cutting corners. Perform a thorough inspection on the property, but do so efficiently and productively. Far too many investors drop the ball on property inspections and evaluations. As a result, they take weeks and/or months to accomplish them or abandon them altogether. Therefore, if you inspect a property and quickly move on to the next stage of the process, the lender knows to take you seriously. Thus, you receive a better chance of obtaining the property.
Don’t Demand Concessions
Lenders and banks definitely don’t enjoy working with someone who makes excuses or demands little extras. Remember, the lender is already losing money on these properties by selling them for far less than they’re owed. Therefore, asking the lender to pay for inspections or repairs generally translates as you trying to take advantage. As a result, they won’t take you seriously as an investor.
Occasionally, lenders pay for some repairs, but these requests rely heavily on good timing. This is where the art of negotiation plays a major part. Lenders won’t agree to pay for extras at the initial offer stage. However, if you find major problems during an inspection, you should renegotiate the purchase price.
No matter how you go about it, always be prepared to move quickly when it comes to snagging REO properties. These deals can disappear in the blink of an eye, so it’s important to be ready to act fast.
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