Why Buy An REO?
Technically speaking, the home was foreclosed on because the owner of the home failed to make their scheduled payments. The bank set up and went through a public auction, but there was not any bids placed on the home, so the bank ended up owing the property. Yes, the home was foreclosed on, but it is well past the foreclosure process and the bank will be anxious to get rid of the property.
Advantages of REO vs. Foreclosed Property
When you are thinking of buying an REO you have to distinct advantages that a buyer does not have with a foreclosed property. The first is that you are able to buy on your schedule, as you do not have an auction date to work with and around. You can make an offer of the home any time; you dont have to wait for bidding to begin. Another big advantage of an REO compared to a foreclosed property is that you can inspect it before you buy, when you cannot do this with the majority of foreclosed homes that you think about purchasing. Being able to inspect the property before you buy will let you know how big of a project you will be dealing with.
Best types of REO to purchase
You might not think the type of loan the home was purchased with the first time around matters but it does. You should attempt to purchase REOs that had a conventional loan the first time around, as you will likely get much better deals with these than you will if you look at FHA and VA loans. The federal government backs FHA and VA loans, and the government can actually buy them back if they are so inclined. Homes that had conventional loans the first time are often purchased for just a fraction of their value, meaning that they can make an investor a lot more money.
Which REOs you should not purchase
Just because the bank owns a property does not make it a good deal. In fact, when you see that a home or property is an REO you have to wonder exactly what IS wrong with it. The house was not bid on because no one saw the worth in it. Did the home just not have enough equity? Were their IRS liens against it? Was the property just too badly damaged? You need to ask these questions. If the bank cannot answer the questions then you need to be even more skeptical. Take advantage of your right to inspect the REO so that you can see with your own eyes what may or may not be wrong, hire professionals if necessary as well.
One must also be sure that if they are purchasing an REO to fix it up and sell it, that the property is located in a desirable part of town. If the home is not located in a desirable part of town, you should really think about how wise of an investment the property may be. Perhaps location is why the property was not bid on at auction. There are three big things to consider when dealing with any type of real estate and those are location, location, location. Never let a seemingly good deal let you lose sight of how important location is for any piece of real estate that you intend to sell.
Why the bank will sell an REO cheap
Basically, a bank is not set up to deal with real estate. Sure, they give loans to people, but really, they are not equipped to buy and sell real estate. Because banks are not accustomed to dealing with real estate, it often takes them awhile to get the ball rolling so that they can repair the property, and get an agent to sell the property. What this means is that while the bank attempts to get their business together they are losing money hand over fist and the federal government often penalizes them for each and every REO that they acquire.
Because the bank is loosing so much money on each REO, they are willing to sell it fast and cheap. In fact, banks commonly sell an REO property for around 30% of its value just to be done with it. Sure, they end up losing money on the deal, but they end up losing less if they sell cheap now than they would if they kept the property for another six months while they try to pull everything together so that they can sell the property.
The great thing about working with the bank with an REO is that you arent buying site unseen. Because you can walk through the house and make all the inspections that you want, you can deal with them in a way that will give you the best deal, and the bank will typically be happy with any serious offer because it will get the house off of their hand and they will stop losing money.
Generally REOs are a great investment as long as you know what you are getting into. The bank simply wants to get rid of these homes, and if you find the right property and are ready to make the serious investment, it can be a great way to get off and running in the real estate business.