When it comes to property investments, buying REO property presents a unique opportunity that you should take advantage of. Continue reading to find out why and how to buy such properties.
Before we get into the real estate investing tips on how to buy REO property, let’s first take a look at what REO means.
What Is an REO Investment Property?
REO stands for ‘Real Estate Owned’ which refers to a bank owned property. Here’s how a property turns into an REO:
1. Initially, the property is owned by an ordinary person who either lives in or rents out the place. They purchased the property using a mortgage. When the owners fall short on mortgage payments, their property begins to go through the stages to become an REO.
2. The second stage is when the lender/bank proceeds with legal procedures to foreclose on the property. So, in essence, REO properties are bank foreclosures.
3. Next, the bank/lender offers the property for sale in a real estate auction where homebuyers or real estate investors bid on the property. The property is sold to the highest bidder.
4. If the bank fails to sell the property at the auction, the lender takes ownership of the property and it is then classified as a Bank REO
Now that you have an idea of what REO properties are, let’s talk a little about the pros and cons of REO investing:
The Advantages of Buying REO Property
Investing in REO properties could be very advantageous for many different reasons:
- You do not need to search long for these properties as there are many ways to find them. They are usually listed with a realtor, on the bank’s website, or you can find them in online marketplaces like Mashvisor’s.
Visit the Mashvisor Property Marketplace now to find and analyze an REO property.
- Not only can you find REO properties in a number of different places, but you also have plenty of options to look through and analyze. Therefore, you will rarely find yourself in a take-it-or-leave-it situation, whatever the state of the local housing market.
- You are dealing with a bank rather than emotional homeowners. Not having to deal with a motivated seller who might be selling due to a death in the family or a family issue can mean the process goes more smoothly. When buying REO property, you are dealing with a professional entity that, although motivated, is business-oriented.
The Disadvantages of Buying REO Property
Now, there are a few disadvantages you must consider before buying REO property to make sure you are on the safe side:
- The earnest money is a disadvantage because it is a lot higher than buying from a homeowner. In many cases, the bank requires around $1000 instead of the regular $10-$25 amongst homeowners.
- Because these investment properties are usually up for sale at discounted prices, there will be some competition. Banks may receive multiple offers from real estate investors who are looking into buying bank owned properties.
As a real estate investor, all you need to do is to weigh the pros and cons and see what works best for your situation. In many cases, you’ll find that you are able to work out the challenges and acquire a once-in-a-lifetime deal, that is especially if you follow our 8 tips.
Related: 5 Questions to Ask Yourself Before Investing in Real Estate
How to Buy REO Investments: 8 Tips
#1. Research the Real Estate Market
Conducting a search for investment properties for sale requires that you determine your target market first. Therefore, a real estate market assessment comes in handy when looking for promising locations. But one thing you must pay attention to is that a lot of REO properties in a single neighborhood or area is not a very good indicator of market health or performance. Since they’re foreclosures, too many REOs might indicate a bad economy in that specific market, for example. So, do your research well before buying REO property.
Related: The #1 Best Resource for Performing Real Estate Market Analysis
#2. Get a Pre-Approval Letter
As mentioned, high competition is one of the pitfalls of buying REO property. However, a pre-approval for a loan can put you ahead of the game and help you save time on acquiring these real estate deals.
Now, one smart way to go about this is by applying to the same lender who owns the property. In this way, they have access to your financial information and it can be easier for you to get prequalified for a loan and close the deal. Another tip is to look for listings at your local bank where you’ve been a client. This way, it might be easier to get access to REO deals as well as financing.
#3. Work with a Real Estate Agent
One way to mitigate the risks of buying REO property is by working with a real estate agent. Their expertise can save you a lot of time and effort in trying to find lucrative properties through real estate investment analysis and market analysis.
Related: Do I Need a Real Estate Agent to Buy Investment Property?
#4. Narrow Down Your List
Of course, at first, you need to have a few investment properties on your list in order to be able to compare and sort out your properties of choice. The best way to do this is to narrow down your list to the top 3 properties which make sense to you and your goals for buying REO property. Your initial criteria should be based on your goals, investment strategy of preference, and your budget.
#5. Don’t Skip Property Assessment
Buying REO property is a process. So, once you’ve narrowed down your list, it is time to move on to property analysis. This process includes the typical investment property analysis as well as a real estate market analysis. Assess the profitability of the location, the return on investment measures, and find out what the optimal rental strategy or investment strategy is in general (whether it’s flipping houses or renting them out). For this, you will need market and property data. If you’re searching for bank owned homes in the Mashvisor Property Marketplace, every listing will have an analysis for you to review as you sift through your choices. When you’re done, you’ll be able to find an REO property that makes the most sense for your financial independence!
#6. Have a Professional Inspect the Property
Buying REO property requires property inspection. Since this property went through the foreclosure process, it is absolutely important that you inspect the property as it may have been damaged or neglected. Hire a professional real estate inspector and examine the property inside out. Make sure you know the amount and cost of work you’ll have to do if you end up owning the property.
#7. Perfect Your Offer
At this point, you are ready to proceed with the actual steps towards buying REO property. Your real estate agent can help you put together an offer that is more likely to be accepted by the lender. However, there are a few things we would recommend to make an offer that will stand out. First, learn as much as you can about the property history. Second, find real estate comparables (perform a comparative market analysis). Third, learn about the number of offers that have been submitted for that specific property. Finally, provide all the necessary documentation including your pre-approval letter. In this way, you’ll be able to address all the requirements of the bank.
#8. Do Your Own Title Search
Now, we know that the bank is supposed to do that before giving the property an REO status. However, assuming it will only be a mistake that might cost you a large sum of money. Be sure a proper title search has been conducted or hire a professional to perform one for you.
With these real estate tips, you are sure to find a profitable REO property! Start your search now.