One of the acquisition strategies many seasoned real estate investors swear by is REO properties. However, it is a very challenging field to step into and requires patience, relationship building, and risk taking that might not be for the novice investor. There are certain aspects that one needs to be aware of when trying to acquire an REO property. Perhaps the most important aspect is that investing in the REO market is a strategy that requires a high level of sophistication and diligence. The learning curve is far beyond what most people realize. This overview is intended to get you familiar with complexities the REO property market.
So, what are REO properties? REO stands for “Real Estate Owned”; a real estate owned property is a property whose ownership has lapsed back to the bank or mortgage lender. There are many steps through which a property goes before attaining the infamous REO title. Below is the life cycle of an REO Property.
1. Borrower associated with the commercial or residential property defaults on the mortgage.
2. Lender pursues foreclosure action to repossess the property.
3. Lender attempts to sell the property at auction.
4. Property fails to sell, or lender ends up being the highest bidder.
5. Property is deemed real estate owned; it is a liability of the bank.
6. Lender lists it for sale.
Like with any acquisition, there are multiple avenues for an investor to generate profit on an REO property. The two most common are: Fix-and-Flip or Rehab-and-Rent. The Fix-and-Flip option is great for a significant short-term gain. On the other hand, Rehab-and-Rent offers smaller gains over the years, but also allows the investor to take advantage of appreciation in property value. It is important to have an exit strategy in mind when acquiring any property, including REOs.
REO acquisition can be challenging. Compared to a typical property purchase, for REO homes banks often ask for a higher good faith deposit when the contract is signed. In some cases, this deposit is non-refundable. That means you will need to perform due diligence prior to placing an offer.
Negotiations with a bank or lending institutionare also more challenging than with a typical seller. Banks are tough negotiators. If there are multiple offers, they might ask for the highest and best offer. Banks may also be unwilling to consider certain aspects about the offer or purchaser that an individual seller may consider during negotiations. At its core, because the REO property is a liability to be mitigated, the bank’s decision process is much more cut-and-dried.
Overall, the high-risk high-reward sentiment holds true for REO investments. It is a time consuming and labor-intensive process with gains that may be substantial – if the investor keeps him/herself abreast with market changes. Have you considered REO properties for your investment portfolio? Let me know what other questions you have about REOs.