Scoring the best investment real estate deals in your marketplace
Property investors are famously great deal-seekers. Even with the decrease in the foreclosure levels, REO remains one of the main sources of investment real estate transactions. Flip and rental assets are readily accessible if you know where to look for them. Here is how to locate REO real estate assets owned by banks.
What’s an REO?
REO is the widely used acronym for “property-owned.” But what does that actually mean?
REO is a foreclosed asset that the lender has re-possessed for non-payment of the mortgage loan. Not all foreclosures are the asset of a bank. It is only when a lender is not able to sell the asset at a public auction that the asset turns into a REO and the bank takes ownership of it and resells it.
How do REO Foreclosures operate?
Each state has its foreclosure laws, but here is a simple overview of how REO Foreclosure functions.
- Homeowners are lagging behind on house payments.
- The lender files a default notice (or lis pendens). If the homeowner doesn’t manage to pay the current loan, the lender shall continue with the foreclosure phase.
- The real estate asset is offered for sale at a public auctions. The winning bidder is now the owner of the house.
- If there is no winning bid on the house, the property will be returned to the bank.
- The bank resells the asset – typically through a local property agent on the MLS.
Why are REOs a Good Deal Source?
- Real Estate is in disrepair
- Second Mortgage
- Banks are in the business of loans, not in the property sector
Bank-owned REO assets that require repairs
When an owner of a home can no longer meet mortgage payments, how probable is it that they can afford the house’s maintenance? Frequently, REOs are marked with delayed repairs – and sometimes even bigger problems. REOs are mostly fixer uppers, but not all the time.
Fixer upper assets cannot ask for maximum marketplace value. Not only are repairs required, there is a risk in the mix. Investors take into account real estate deficits and draw on benefit estimates while making offers to the REO.
Get rid of second mortgages with REOs
Lots of homeowners have a first and 2nd mortgage. If the lender holding the first one (which is the main one and typically bigger mortgage) forecloses, the second one will be cancelled after the public auction sale of the asset. Clearing the bonus debt on the asset will make it a possible transaction. Actually, all liens against the asset, save for tax liens, are rid of after the selling of the asset at an auction. Consult with your property attorney or title office to check the status of any liens or judgments against the real estate asset.
Banks are in the money sector, not in the property industry.
Banks holding non-performing loans and bank-owned assets cannot do much. To go into more details, their capital is locked up – and not available for loans. Moreover, the Feds mandate them to hold minimum reserves well over their bad loans – further stopping their chance to provide loans. Which motivates them to get rid of bad loans and sell REOs.
Placing an offer for a bank-owned home
This could be surprising, but not all bank assets are offered for sale by your local property brokerage. Banks use a number of distribution outlets to market and sell repossessed assets and off their books.
How are banks selling assets
- The property broker: The asset manager gets himself a REO property agent to advertise the property. They manage the selling as a seller in the name of the bank.
- Via a 3rd party auction firm: The asset manager shall position the asset with an auction firm like Hudson & Marshall, Auction.com, or Hubzu.com or with smaller local auction firms.
- Hedge Funds and similar financial entities: Lenders market “bulk packages” to a wide range of customers. In some cases, they sell the assets; in some, they sell the mortgages. The mortgage purchaser either sells or re-positions the debt.
Purchasing a bank-owned asset straight from a bank
Lenders have various ways of selling their properties. The majority of them do not sell straight to the individual home purchaser, but they’re not totally uncommon. A tiny, local bank is more likely to see it occur than a mega-bank. Banks usually do not have employees who know about closing property deals – which is why they have asset managers who then arrange sales with local property agents.
Since the majority REOs are sold via local property agents, it is a good idea to locate the REO pro around you. Seeing how banks generally choose one or two agents to collaborate with in all areas, it can be useful to find out who those agents are. But note, they’re operating in the name of the SELLER (financial entity) so you cannot get insider access. To locate REO pros in your region, conduct an online search for foreclosures in your location. Scan them for the listing agent – when you see a name pop up time and time again with foreclosure lists, they are probably the agent of the local seller for the financial entity.
Lenders would need “proof of funds” prior to considering your bid.
Could you negotiate a foreclosure with a bank?
Advice for purchasing REO real estate
If you locate a REO you need to buy, here are the main factors that will help you close the deal.
- Proof of the funds: Banks would not deal with purchasers who cannot offer evidence that they got access to the capital to perform the transaction. Evidence of funds can be your lender’s pre-approval letter or a copy of your bank statement if you pay in cash.
- Most of the REOs are sold as they are. Many home vendors may accept restoration contingencies, but a bank probably won’t. In the majority of situations, you can’t discuss a foreclosure with the bank. So, please be ready to conduct a detailed analysis and look into the repair budget when you place your bid. But, there are some special cases. For instance, the majority of those who buy homes can’t get a conventional loan unless the asset has a stove/range. In such situations, a range would be installed by the financial institution. Since the majority of investors do not use conventional financing, this is generally not a problem, but it is good to be informed on it.
- Closing costs are not normally calculated in. Depending on your region and how tough your marketplace is you cannot think that the bank/seller will deal with the closing costs. Again, budget this to your bid.
Where will I find a listing of real estate owned by banks?
Besides contacting the local realtor, you can to dive into the subject to locate a list that does not appear on the local multiple listing service.