What is an REO? (Real Estate Owned)
The term REO is used to refer to a piece of real estate (property) owned by a bank, and capitalists usually get excited at the thought of investing in an REO property since they consider it to be easy money making options. An REO is different from a foreclosure property in the sense that the bank has already tried to sell it at a foreclosure auction and has not been successful in getting bids, and following this, the bank then became the owner of the property because the property was not bid on. As expected, the bank is not too interested in keeping the REO for any longer, and this makes it a good opportunity to cash in on for an investor. However, it must be remembered that every REO need not necessarily be a good deal, but in general, it has been seen that when it comes to an REO there usually is a lot of money waiting to be made.
How different is an REO from a foreclosure?
In reality, the home was foreclosed since the owner of the home was not successful in making the scheduled payments. Subsequently, the bank arranged for and carried out a public auction, however since there was no bids placed on the property in question, the bank ended up owing the property. Hence, though the home was foreclosed on, it is well past the foreclosure procedures and the bank is willing to dispose off the property, usually in a hurry - much to the benefit of a potential investor.
Advantages of REO as Compared to a Foreclosed Property
While considering purchasing an REO, the investor usually has two distinct advantages that he would not have had, had he been dealing with a foreclosed property. The first of these is that you are able to buy at your convenience with no auction deadline to work with and around. You can therefore make an offer of the home as soon as you have enough liquid funds and there is no requirement to wait for the declaration of the bidding date to begin. The other big advantage of investing in an REO as compared to a foreclosed property is that you have the option of inspecting it thoroughly before you actually close the deal; this option is seldom available with the majority of foreclosed properties that you consider purchasing. By being able to do this, you will get to know how substantial a project you are going to be dealing with.
REO Best Buys
Contrary to popular belief, the type of loan that was used to purchase the home the first time around usually makes a big difference. It is best to purchase REOs that had availed of a conventional loan the first time around, as these are likely yield much better deals as compared to those that used FHA and VA loans. This is because the federal government backs FHA and VA loans, and if the government so desires it can actually buy them back. On the other hand, homes that had used conventional loans the first time are usually purchased for just a fraction of their value, and thus they can help an investor make a lot more money out of dealing with these types of REOs.
REOs to be wary of
The only fact that the bank owns a property, is not reason enough to make it a good buy. On the contrary, when you come across a property that is an REO, you might begin to wonder what exactly might be wrong with it. The common questions that come up are whether the house was not bid on because nobody saw the worth in it or whether the home simply did not have enough equity. So also whether or not there were their IRS liens that were against it or whether the property was badly damaged. The bank needs to be able to confidently field these questions before you consider buying the REO in question. You must ensure that you inspect the REO so that you can personally verify what may or may not be wrong and hire professionals if required as well. You also need to be sure that if the REO is being purchased with the intention of reselling it, the property must be located in a good locality in town. If this is not the case, you should seriously contemplate how wise an investment the property might turn out to be. It has been seen that in spite of remarkable properties, takers are few if the location of the same is unattractive.
Reasons Behind an REO's Low Price
The reasons behind the throw-away prices that banks usually offer to dispose off REOs has got to do with their core competencies. Since banks are not set up to ideally deal with real estate, though they give loans for this purpose, they are seldom equipped with the expertise required to buy and sell real estate. To make matters worse, the federal government usually also penalizes banks for each and every REO that they acquire. This implies that since the bank ends up loosing too much money on each REO, they are often willing to sell it fast and cheap. In fact, statistics say that banks tend to sell an REO property for around 30% of its original value just to get rid of it. They definitely end up losing money in the bargain, but they will lose less if they sell sooner though at a cheap rate than keeping possession of the property for longer, before they try to sell the property.
The most important aspect about going for an REO is that you need not settle for the property leaving the site unseen. You have the liberty to walk through the property and make all sorts of inspections without annoying the seller - in this case, the bank since it will help them get rid of the property and they stand to gain by not losing money further.
REOs therefore are a great investment as long as you have a clear understanding of what exactly it is that you are getting into. The bank simply wants to dispose off these homes, and if you manage to find the right property and are all set to make the serious investment, it can prove to be a great way to make your plunge into in the real estate business and run it successfully.
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