Many beginner investors overlook bank owned homes (otherwise known as real estate owned properties). However, those who take the time to understand this type of property realize that they are a great source of investment opportunities. These properties usually come with lower prices, less competition, and can yield high returns. But like all real estate investments, you can easily get burnt if you don’t know what you’re doing. We’ve put together the ultimate guide to provide you with in-depth knowledge on bank owned properties and answer common questions beginner investors have about them. To learn how to find REO bank owned homes, how to finance them, and the steps to buying them, just keep reading!
What Is a Bank Owned Home?
Before anything else, let’s first explain what exactly an REO property is. These are foreclosed homes which failed to sell at an auction and are now technically owned by lenders – such as a bank or creditor. Lenders foreclose properties when borrowers default on loans and then try to sell them to get their money back. When no bidder offers the amount sought to cover the loan, lenders will take ownership of the property. Therefore, real estate properties (whether a detached home, condo, townhouse, land or commercial property) become bank owned homes after going through the foreclosure process.
Here are the three stages of the REO process in detail:
- Loan Default: This occurs when the homeowner (borrower) fails to make mortgage payments for a certain length of time. It’s usually specified in the mortgage terms. After 90 days of missed payments, the lender will send a Notice of Default and start the foreclosure process.
- Foreclosure: This is where the property goes to foreclosure auction. In this stage, the lender will try to sell the property to the highest bidder. If it’s sold, the bank will recoup some of the money owed on the mortgage.
- Real Estate Owned: If the home fails to sell in the previous stage, the bank repossesses the property and it becomes bank owned. At this stage, lenders remove the occupant and liens on the property, determine a price, and try to sell it on their own – usually through a broker.
Is Buying These Properties a Smart Investment?
Real estate owned homes are attractive for property investors and for many reasons. Here are the benefits that make buying bank owned properties for real estate investing a smart decision:
1) They’re Listed at Discounted Prices
Banks and mortgage lenders don’t accumulate wealth by holding onto non-performing properties. They do so by loaning money to borrowers and collecting interest. More importantly, banks don’t want to hold onto loans that aren’t producing returns. As a result, after repossessing properties, lenders are more than willing to part ways with them. Here lies the first benefit of investing in foreclosed bank owned homes for real estate investors.
Banks want to liquidate their REO properties ASAP to recoup the capital they loaned. It’s safe to assume that banks are motivated sellers. In some cases, they’re willing to sell these properties at a discount to avoid holding onto them and losing more capital. For a real estate investor who knows how to find good deals and navigate the REO process, this makes bank owned homes very desirable! So, if you want to find cheap investment properties, look for bank owned properties for sale.
2) There Are No Outstanding Taxes and Title Liens
If you’re going to buy investment properties via a traditional real estate transaction, you’re bound to get involved with some issues that complicate and delay the sale. One of the major issues buyers typically run into is outstanding taxes and title liens that must be resolved before the sale of a property. On the other hand, the majority of REO bank owned properties are free of such issues and other outstanding claims. This is because once a property becomes REO, the lender wipes out any liens against it and makes sure all taxes are paid. This helps property investors save a ton of money and close the deal faster.
3) There’s No Homeowner to Deal With
When there’s no outstanding tax and title liens, this also means that there’s no homeowner to negotiate with! When buying bank owned homes, you won’t negotiate with sellers who have a personal attachment to their homes, but rather with a bank which wants to recoup its losses. For a real estate investor, this will help save time during negotiations. This also gives you another benefit: the ability to inspect the property.
When buying an investment property at a foreclosure auction, you may not have the option to fully inspect it before making an offer. But when the property becomes REO, you can then hire a home inspector. This is important to any investor as a home inspection provides a transparent layout of the home, shows what issues need necessary repairs, and can be used as leverage when the time comes to sit down at the negotiating table.
4) There Are Many Ways to Make Money with REO homes
If you’re wondering how to invest in bank owned REO properties to make money in real estate, there’s more than one way to choose from – depending on your strategy and personal goals. One strategy is to buy bank owned homes for rent. This way, you’ll get to make money through monthly rental income that you collect from tenants and generate cash flow. This strategy also allows you to benefit from real estate appreciation if you hold onto the rental property for the long term.
If this is not you’re preferred real estate investment strategy, consider investing in REO property as a fix and flip. This way, you’ll buy the house for a cheap price, invest in renovations and home improvements that increase its value, and sell it for a higher price. The fix and flip strategy is a popular way of investing in real estate and, when done right, it can bring you quick profits.
For more ideas on how to invest in real estate properties, read Top Six Real Estate Investment Strategies.
With all these benefits, there’s no reason why bank owned homes couldn’t be the source for your next real estate investment! But how do investors find these properties?
How to Find REO Properties Near Me
An important question that you should ask is how to find REO bank owned properties for sale that will be profitable as investment properties. There are a number of ways for investors to search for and find a bank owned property in the US. This includes:
- Contacting Lenders Directly: This is probably the best way to find bank owned properties as some lenders are willing to provide you with a list of their available REO properties for sale. This can also help you avoid the competition found on public bank owned homes listings.
- REO Listing Agents: This is easier and more reliable for a real estate investor. These agents can find several options in your area from more than one lender and help guide you on the right price.
- Searching the MLS: Most lenders list their REO properties on a Multiple Listing Service. This means your real estate agent can help you identify REO investment opportunities in your city.
- Bank Websites: Some banks have an entire department set up to sell these real estate properties. In addition, sections of their websites are dedicated to their listings – whether it’s residential or commercial bank owned properties.
While the above ways answer the question of how to find bank owned homes for sale, this is not enough for a real estate investor. Successful investors only invest in properties which will for sure bring in a good return on investment. As a result, you’ll need to have investment tools to quickly find and analyze the potential profits you’ll get from buying bank owned foreclosed homes.
This Is Where Mashvisor Will Help!
Mashvisor has made finding profitable bank owned homes much easier and faster using predictive analytics. Simply enter the city where you’re looking to invest in real estate. Use Mashvisor’s Heatmap tool to do a neighborhood analysis. This tool uses real estate analytics to show how investment properties in this neighborhood are performing compared to surrounding areas. This way, you can ensure that you’re buying in a good location – which is key to successful real estate investing.
Next, use filters to only see residential bank owned properties for sale there. Not only will you get a list of these properties, but you’ll also get their expected ROI readily calculated!
Alternatively, you can visit the Mashvisor Property Marketplace which is exclusively centered around off market real estate including bank owned homes.
Once you’ve found a good bank owned property, you can do an in-depth investment property analysis and get even more data using our Real Estate Investment Calculator. The data we provide to investors includes the cap rate, cash on cash return, rental income, cash flow, occupancy rate, and more! You can also see if the property will yield higher returns as a traditional rental or an Airbnb rental.
To start looking for and analyzing the best investment properties in your city/neighborhood of choice, click here.
Financing Bank Owned REO Properties
Those who plan to pay cash for their purchases must submit a “Proof of Funds Letter” with their offer from the institution where the cash is held. But what if you don’t have the funds to purchase the REO in cash? Well, contrary to some misconceptions, real estate investors can use other methods of financing to buy bank owned properties. With a good credit score, you can even get a pre-approval letter from the lender that owns the property! Some banks offer to finance their REO properties. This actually gives them confidence in you as a buyer and provides them with another way to make money on the transaction.
Moreover, there’s a wide variety of financing options available for bank owned property. The right choice really depends on your purpose for buying. As mentioned, there are many reasons why you’d want to purchase bank owned properties. They can be rehabbed and rented out, fixed and flipped, wholesaled, or even redeveloped. So, you need to pick the financing option that fits with your investment strategy of choice. According to distressedpro.com, investors can finance bank owned homes with:
- Hard Money Loans
- Private Money Mortgages
- Interest Only Loans
- Conventional Mortgages
- Stated Income Loans
- VA, FHA, and USDA Homes Loans
- Blanket Mortgages
- Commercial Mortgage Loans
- Construction Loans
- Mini-Perm Loans
- Real Estate Crowdfunding
- Transactional Funding
How to Buy Bank Owned Properties in 7 Steps
Step 1: Find a Lender and Secure Financing
No matter what type of loan you hope to get for financing bank owned homes for sale, it’s essential to start the process and get a pre-approval letter early. So, the first step after finding investment properties you’re interested in is to talk to the lender about your financing options. This is critical because, as mentioned, lenders are motivated to sell and get REO homes off of their books. The more prepared you are with financing, the better. Getting pre-qualified by the lender that owns the home definitely speeds up the purchasing process. In addition, the lender will know that you’re financially qualified to buy the property, making them more likely to accept your offer.
Step 2: Hire an Agent Who Knows REO Homes
Many real estate investors would forego hiring an agent when buying their investment properties. While you can do that, having an agent is still recommended especially for beginners in real estate investing. An agent will be your partner and will use his/her experience to guide you through every step of the process of how to purchase bank owned properties. Also, try to find an agent who frequently works with these types of real estate properties. These agents know the ins and outs of negotiating with lenders to get the best possible price, how to calculate the cost of necessary repairs, how to work within lenders’ timeline, and how to prepare you for the next step.
Step 3: Narrow Down Your List of Potential Properties
Once you have a real estate agent by your side, you can start refining your list of bank owned properties. In this step, it’s important to have criteria of what you want an investment property to have. Some major characteristics to consider include:
- Listing price
- Location and quality of the neighborhood
- Number of bedrooms and bathrooms
- Significant repairs needed and their impact on price/value
Most importantly, you need to take into account the expected ROI from this property. After all, you are buying it as an investment, so it should be able to give you a return. Again, our Real Estate Investment Calculator will help you narrow down your list to make sure you end up with the best bank owned homes. This tool uses historic and predictive analytics to give you accurate estimations of a property’s return on investment in terms of rental income, cash flow, cap rate, and cash on cash return. Sign up for Mashvisor to start using this tool!
Step 4: Get an Appraisal and an Inspection
While banks price REO bank owned homes below market value, this doesn’t mean that buying them is an automatic bargain. Some REOs are discounted due to severe damage or because they’re in undesirable locations. On the other hand, a bank owned property can be overpriced based on comparable sales in the area. So, the next step for a real estate investor is to get an appraisal to know the property’s true value compared to the asking price to see if it’s a fair price.
It’s also important to get a home inspection before you buy bank owned foreclosed homes for sale. Some of these properties have been vacant and neglected for months (or even years). As a result, major issues can occur which would cost a lot to repair. To make sure that an REO home is right for you and that no costly issues are overlooked, hire a professional to inspect the home. A home inspection helps investors understand the needed repairs and renovations before committing to purchase.
Step 5: Make an Offer to Purchase
Once you’ve found the right bank owned property, it’s time to make an offer. A good agent will help you decide what offer is likely to be accepted, put together the offer, and submit it to the lender. When making an offer on an REO home, keep in mind major issues that were uncovered by the home inspection. If necessary repairs are well-documented, you can use this to negotiate a low offer. Moreover, the bank will want to know that you’re a serious buyer who can close and who won’t waste their time. A real estate investor can express this by attaching an earnest money deposit check to the offer (commonly 1-2% of the purchase price).
How Much Should I Offer for Bank Owned REOs?
This is the million dollar question everyone wants to know. Investors are drawn to REO properties for their significant discounts. However, some fail in landing a deal because they don’t know how much to offer. No one wants to overpay for cheap property. But at the same time, lenders won’t take you seriously if your offer is too low. You need to have an offer that has a good chance of being accepted and provides value to you. Here are some quick tips for making a great offer:
- Do your homework: Make sure the offer is comparable to the recent sales of similar homes in the area (real estate comps). If you find that the bank has overpriced the REO home, you might offer a lower price and explain your reasons in a cover letter.
- Include a net sheet: This breaks down all of the closing costs so that the bank will see how much they’ll pocket from the sale from your offer.
- Document everything: Lenders already have an idea of what they think the property is worth. But, you can justify your offer by including documents about the property’s condition, estimated costs of renovations, and comparable sales.
- Show that you’re the easiest buyer: Banks want to see that your offer is the most reliable option and the fastest to close. You can express that by including your approval letter to highlight how secure and low risk your offer is.
Step 6: Negotiate the Terms
In spite of the myths, a real estate investor can negotiate with banks – especially if he/she was the one to reach them first. You can negotiate the price, who pays which costs, the right to inspect the property, and the closing date. Just keep in mind that negotiating with lenders for bank owned homes is different from negotiating with homeowners. As mentioned, there is no emotions involved here as there would be when dealing with a homeowner.
On the other hand, banks typically take longer to respond to an offer than a homeowner. This is because several individuals or companies must review the offer before giving approval. When lenders respond, they’ll expect you to respond quickly in order to keep the purchase process moving. Also, banks are more likely to present a counteroffer as they want to demonstrate they tried to get the best possible price for the property. A skilled and experienced agent may be a valuable ally in the negotiation step.
Step 7: Finalize Your Loan and Close the Deal
Once you and the lender have agreed on the terms, you’ll need to fill out paperwork and share information to finalize your loan and ensure it fits with your offer. Then it’s time to verify the status of the title. Typically, banks clear the title before selling an REO property, but you can’t assume that this is the case. So, contact the lender to see if the title has been cleared or not and have a title company ready to run a title search in case you are expected to do so yourself.
Once your loan is finalized, it’s time to close. Closing on bank owned homes is similar to any other closing – but there’s an exception. If you don’t close by the predetermined date, the lender may charge a penalty for each day beyond the deadline. By following the first step of getting pre-qualified for a loan and securing financing, you can avoid any delay. At the closing, you and the lender will sign the necessary documents to transfer the house into your name and finish your mortgage. Finally, after signing everything and transferring the money, you’ll get the keys to your new investment property.
Looking for profitable investment properties for sale in your city? Start your free trial with Mashvisor to begin and end your search in a matter of minutes!
Things to Know Before You Buy REO Homes
1) You May Have Competition: If you think an REO property is a great deal, chances are other investors will too. If there are other offers on the table, work with your agent to find out what the bank wants. This helps you write a great offer with a good chance of getting accepted.
2) Banks Sell REO Properties “As Is”: Banks are not interested in spending money on a non-performing property. Meaning, once you buy bank owned homes, you’ll be left with all of the repair work. Keep in mind that some of these properties will have major issues which will cost a lot to fix. Again, get a home inspection to determine any major issues and estimate repair costs.
3) Make Sure You’re Financially Prepared: This goes hand in hand with the previous point. If you find an REO property that requires a lot of work, make sure you’re financially prepared for the outcomes. Meaning, you should be able to afford to make repairs and know how much the home will be worth after completing renovations.
4) Patience Is Required: REOs involve stacks of paperwork that need to be reviewed, which means it can take weeks to hear back from the bank after submitting your offer. Moreover, the negotiation step may take longer as your offer is likely to be met with a counteroffer. You need to be patient and ask your agent to keep you informed as you wait.