Real estate owned properties, otherwise known as REOs, represent those homes that were repossessed by banks and lending institutions for the respective owner’s failure to keep up with mortgage obligations. As you may already know, REO properties were a big reason real estate investing ticked up over the course of the Great Recession. Banks, at the time, were not in the business of holding onto properties they repossessed and wanted to sell them immediately, if for nothing else other than to remove non-performing loans from their books. Savvy investors took advantage of the opportunity and were able to capitalize on cheaper homes with larger spreads.
Today’s appreciation rates have once again contributed to the rise of REO properties held by lenders and banks, at least in some of the most expensive regions. That said, the opportunity for you to find an REO property that meets your investing criteria is better than it has been in years. There is no way around it: buying REO properties is a great strategy at the moment.
If you are interested in buying REO properties, consider the following tips when you want to make an offer:
For one reason or another, some investors are intimidated by the prospect of purchasing REO deals, especially bulk REO properties. More likely than not, it’s because they don’t understand the process or the best way to go about doing things. However, with a little due diligence and the following tips, buying REO properties may be easier than you think.
Drop Subtle Hints When Necessary
Sometimes the verbiage you include in an REO property contract can carry a lot of weight, but perhaps even more importantly, are the things you don’t say, or at least hint at. I have noticed that banks with REO properties are diligent in their efforts of finding a potential buyer, and they take many things into consideration. Don’t think for one second that every word you say won’t hold some sort of value. Sometimes the most important things you can say are the things you don’t say at all.
Don’t hesitate to include a stipulation that requests the bank to add a feature of critical importance, not excluding those that concern safety. For example, if the home you desire doesn’t come complete with an HVAC cage apparatus, kindly request the bank to include it before closing. In doing so, you may accomplish two very important things: you will prove to the bank that you are willing to invest money, and that they have a risky and potentially costly property on their hands. By alerting the appropriate authorities to the shortcomings of a home that may be dangerous, they are more likely to rid themselves of the property, if for nothing more than to mitigate risk.
Cash Is King
No longer a mere colloquialism among the real estate investor community, but rather an unwritten rule; the phrase “cash is king” holds more weight today than it ever has in the past. Sellers will favor a cash buyer over those with financing for the simple fact that they are less of a risk and can close without the interference of a third party. Not surprisingly, the advantageous nature of a cash offer transcends the average acquisition, and is extended to the REO process. Banks and lending institutions are just as inclined to accept a cash offer as your typical homeowner.
Banks and lenders are not in the business of holding onto properties, especially those with non-performing loans (those that have already been foreclosed on and repossessed). At the very least, holding onto properties that are not producing any form of cash flow is very costly and a drag on their books as a whole. That said, they are more than eager to sell the properties they repossess as fast as they possibly can.
As it turns out, cash offers facilitate the fastest transactions. If you want to make your offers on REO properties attractive to the bank, you must use cash. Any attempt to use alternative financing will place you immediately behind the eight ball; other investors are more than likely going to be in direct competition with you, and you better believe they are using cash.
Above all else, be ready to close somewhere in the neighborhood of seven to 10 days.
Again, there is a good chance you are not the only investor bidding on a respective REO property. Homes repossessed by banks and lenders do represent a great deal, and tend to attract investors from all over. As a result, you need to do what you can to make your offer stand out from the rest they are likely to receive. Outside of offering cash, strongly consider contract terms that banks will find favorable. While price is always important, banks may place a priority on moving REO properties faster.
More often than not, banks are willing to take the path of least resistant to remove non-performing loans from their books, even if it means accepting a slightly lower offer. Refrain from including any unnecessary contingencies, addenda or reflags of any nature that could impede the process in any way. Contract terms should be clear and concise, as not to scare the bank away. Remember, they want to sell the property; don’t give them a reason not to.
If your contract is sloppy or your demands are unrealistic, you cannot expect your offer to be considered.
The Offer Itself
Through no fault of their own, investors are trained to increase potential spreads by acquiring properties at the lowest price possible. Simple economics would suggest that the cheaper you can buy a property for, the easier it will be to make money when it comes time to sell on the back end of a deal. However, do not let this concept trick you into thinking that you can lowball banks into getting rid of their REO properties simply because they do not want to deal with them.
If anything, banks are fully aware of the value of house they have on their own books. Do not attempt to undermine them, at least without empirical evidence. Any attempt to negotiate a drop in price should be met with proof. For instance, it is entirely possible to negotiate a drop in price relative to the cost of renovations both parties have deemed necessary. If several thousands of dollars will be required to fix foundational issues, it is not presumptuous to assume the bank will deduct the cost of repairs from the acquisition price. Again, be prepared to substantiate any claims for lowering the price of the home.
That said, it isn’t wise to start negotiations with your lowest offer. It is important to note that REO properties are somewhat of a hot commodity, and it is only safe to assume there will be a healthy amount of competition. Instead of making a lowball offer that you know they won’t accept, increase that offer a little bit and get negotiations started. If your offer is clean, with updated contracts and inspections waived, they may just accept your first offer.
In the event that your offer is not accepted, do not fret; they will likely counter with an offer of their own. Again, they are willing and eager to sell each and every one of the non-performing loans they currently have on the books. In a perfect world, their counter offer will appease your investment strategy, but in the off-chance that it doesn’t, don’t stray from your strategy.
At this stage, you should have already run the numbers and have a good idea of how much you are willing to spend. Do not go over what you re willing to pay just to acquire REO properties. Only if the numbers add up should you pull the trigger. At the same time, you must use discretion; don’t let a few thousand dollars prevent you from landing a deal that could be worth considerably more.
REO properties are no different than other properties, in that they can ultimately lead to a great deal if you mind due diligence. However, far too many investors avoid them because they don’t know the process. Learning how to buy a bank owned property has become synonymous with a more complex transaction process, and while that may be true, it’s only difficult for those that don’t take the time to do it right. If you are interested in REO properties, consider using these tips to help you get started.