Pros and Cons of Buying REO Property for Real Estate Investing

Buying REO property can be an excellent move for acquiring real estate deals for investing purposes – but not without some challenges.

Real estate investors are always looking for the best deals, and REO property listings are a source that you should not ignore. However, if you want to be successful in your investing journey, you need to be aware of how REOs work and how to purchase one.

In this article, we will talk about the REO property meaning and the pros and cons of buying one for real estate investing. Read on and learn about a few REO buying tips.

What Is an REO Property?

An REO property (otherwise known as real estate owned) are properties that went through the foreclosure process after the owner defaulted on the mortgage, failed to attract a buyer at a foreclosure auction, and is now owned by the bank. REO properties are considered a major point of interest in the real estate investing business. In fact, they’ve become synonymous with some of today’s lucrative investment deals.

Beginner investors tend to keep their distance from REO properties. However, experienced investors are aware of how profitable these investment properties can be (both for landlords and flippers). So, if you’re thinking of investing in real estate, keep reading to know why buying REO property is a smart move for beginner investors and what to keep in mind before venturing into the real estate owned territory.

Pros of Buying REO Property

Purchasing an REO property comes with several benefits, including:

1) Prices of REO Properties Are Discounted 

Banks don’t accumulate wealth by holding onto non-performing properties or loans that aren’t producing any returns. So, when a property becomes real estate owned, the bank is at a disadvantage in terms of losing money on its investment. Therefore, it’s safe to say that banks are highly motivated to get rid of any property they repossess. Moreover, if an REO property is a major liability, the bank aims to sell it ASAP to minimize losses.

Here lies the first benefit of buying REO property for real estate investing: banks are more willing to sell such properties for cheap than to hold onto them. It’s even likely for property investors to find real estate owned properties for less than the market value. As a result, these investment properties are a great deal for savvy property investors with limited or little capital.

Related: Real Estate Investing for Beginners: Investing With Little or No Money

2) REO Properties Are Free of Outstanding Taxes/Title Liens

Unfortunately, when buying an investment property, a real estate investor might come across issues that call into question the legal owner. From taxes to title liens, such issues can hinder a prospective buyer from taking full ownership of the property. However, REO properties are rarely accompanied by such issues.

Once a property becomes REO, the bank will immediately wipe out any liens against the property. Most of the time, banks also make sure all taxes are paid. In such a way, there are no questions regarding the status of the investment property. It also means that there is no homeowner to negotiate with, which helps property investors save a ton of money when buying REO property.

3) REO Properties Yield Great Returns   

As mentioned earlier, any real estate investor can benefit from investing in real estate owned properties, whether as a landlord or flipper. A landlord can buy an REO property and turn it into a rental property. In such a way, the property will generate rental income, and the real estate investor will benefit from cash flow. In the long-term, you can sell the REO occupied property for a higher price than your initial investment after it has gained value from appreciation.

On the other hand, another property investor might be interested in making fast money by flipping real estate, in which case buying REO property is also a smart investment decision. Since real estate owned properties sell for a lower price, a house flipper can buy, rehab, and sell them quickly to make profits. In either case, REO properties allow beginner investors to buy low and sell high!

Related: 6 Strategies for Buying an Investment Property Low and Selling It High

Cons of Buying REO Property

Along with the benefits, here are a few drawbacks to consider when acquiring an REO property:

1) More Competition for REO Properties

Real estate owned properties aren’t without some drawbacks. The first one is that many property investors on the market understand how buying REO property is a smart investment decision and a good way to make money in real estate. As a result, so many are submitting offers, so you’ll need to be ready for some competition. Working with a real estate agent who’s experienced in buying REO properties can help you formulate an offer that’ll make you stand out from others.

2) Banks Sell REO Properties “As Is”  

The second drawback to buying REO property is that banks will often sell them as is. Sometimes, an “as is” REO property is in need of extensive repairs, and the real estate investor might need to fix them up. It might not be a big deal if you’re buying REO property to fix and flip. However, it could negatively affect the return on investment for property investors with a limited budget or property owners who want to rent out the property after purchase. They might need to spend more than they expected to turn the property into a rental.

However, it should be noted that there is some good news here: property investors can request a home inspection for real estate owned properties prior to contract (unlike in foreclosure auctions). Also, repairing an REO property is not necessarily a bad thing. Property investors can look at it as forced appreciation to increase its value.

Related: How to Force Appreciation on Your Income Property

Buying REO Property Tips

To be successful in REO investing, here are a few tips to guide you:

1) Research the Market

Looking for REO properties for sale involves identifying your target market. Evaluating your target real estate market is important when searching for promising locations. One important thing to take note of is the number of listed REO properties from a single neighborhood. A high number indicates that the local market’s health or performance is less than ideal. Make sure to do extensive research before purchasing an REO property.

2) Use Mashvisor’s Tools

After determining your target market, it’s time to look for properties and analyze their investment potential. To help you in the process, you can use a number of tools from Mashvisor. The platform provides comprehensive listing information obtained from reliable sources, such as Airbnb, MLS, Redfin, and more.

Property Marketplace

For investors looking to get their hands on REO investing, Mashvisor’s Property Marketplace is an excellent resource for finding an REO property for sale. The platform enables investors to find off-market properties, such as bank-owned homes, foreclosures, and tenant-occupied rentals, easily and efficiently.

The Property Marketplace comes with property filters that help narrow down your search according to location, distance (miles), budget, rental strategy, and type of property. You can also filter by the number of bedrooms and bathrooms, cash on cash return, cap rate, and listing type.

Investment Property Calculator

In addition to the Property Marketplace, you can also use Mashvisor’s state-of-the-art Investment Property Calculator to conduct a comprehensive analysis of the REO property with the click of a button. The tool helps you calculate key metrics, such as cap rate, cash on cash return, and cash flow from the property. With the Mashvisor-provided data, you can make an informed decision and decide on the optimal strategy for your real estate investment.

3) Work With a Real Estate Agent

A real estate agent is your best ally when buying an REO property. With their experience and knowledge of the local market, real estate agents can help you save a lot of effort and time during your property search.

In addition, if you lack the required skills to close a deal, they can help negotiate an offer on your behalf. With the real estate agents’ negotiating prowess, you increase your chances of securing a favorable price for your preferred property. To find a capable one, ask for references from previous clients or consult the latest real estate agent directories.

4) Hire a Professional to Inspect the Property

Before closing the deal, make sure to get the property inspected for damages or signs of neglect. You can hire a professional property inspector to assess the exterior and interior of the property thoroughly. They can help you calculate the cost of potential repairs and estimate the initial cost of your real estate investment.

Purchasing an REO property requires a lot of work than you can imagine. However, you can be assured of favorable returns in the future if you spend the time and effort to research and assess the property right at the beginning.

The Bottom Line

As you can see, there are some impressive benefits to buying REO property – definitely more pros than cons. For real estate investing purposes, they make for a smart investment, especially for beginner investors. Even if you’re an experienced real estate investor looking to grow your portfolio of investment properties, there’s no reason why an REO property couldn’t be your next deal.

We do encourage you to take the time to carefully research and do your due diligence before jumping into real estate owned properties for investing purposes. So, make sure to subscribe to receive our blogs as soon as they are published and stay up-to-date with the latest trends, guides, and tips for real estate investing!

If you’re looking for other options for investment properties, use Mashvisor to find the best one! We provide property investors with the necessary investment tools to help them make the best decisions and find the best properties to invest in to make money in real estate.

Do you have questions about Mashvisor? Click here to read our FAQs and learn about our tools.

What’s your experience with REO property? Do you think you’ll invest in one in the near future?