If you are looking to buy an investment property at a discount, one great option would be a bank-owned property. Otherwise known as real estate owned property (REOs), bank-owned properties refer to foreclosed properties whose ownership has reverted to the mortgage lender or bank after an unsuccessful sale at a foreclosure auction.
Buying a bank-owned property can be a great way for real estate investors to get a hold of a lucrative deal. However, some investors are intimidated by them because of the level of risks that accompany them. They often require more renovations relative to other properties in the housing market. But for investors who take the time to understand how to buy bank-owned property, these properties can be a great real estate investment opportunity. The good thing is that you can get one at a significant discount while facing less competition.
If you are willing to deal with the risks, you can set yourself up for a great real estate deal. Here are some quick tips on how to buy bank-owned property while avoiding the common pitfalls that come with them.
Related: Buying a Bank-Owned Home for Investment: Pros & Cons
1. Hire a Buyer’s Agent Who Has Experience with REOs
The process of buying REO properties is relatively complex because you are dealing with a lender or bank instead of a usual homeowner. If you are a beginner real estate investor with little experience regarding how to buy bank-owned property, a buyer’s agent can be a great partner to have.
Find a top-performing real estate agent in the city of your choice.
Try to find a buyer’s agent who is experienced with bank-owned properties. The agent will use his/her real estate knowledge and experience to help you find the best bank-owned homes for sale at the best possible prices. A real estate agent will guide you through every stage of the process and ensure that you don’t make critical mistakes. This includes negotiating with the mortgage lender, calculating the cost of repairs, hiring an attorney, etc. An agent who specializes in REO listings is likely to know the ins and outs of buying them. This way, you could save yourself a lot of time and effort.
Related: Working with a Real Estate Agent: What Investors Should Expect
2. Cash Is King
Buying bank-owned property with cash gives you an upper hand when it comes to negotiating a better deal. Even if you aren’t the highest bidder, if you have enough cash, you have more power. Banks don’t want to hold the house for long. They want to get the house off their books as fast as possible and recoup some of their capital. Therefore, a potential buyer with a full price offer is more likely to score the deal.
It’s best to use cash, but if you can’t raise the full price, making a large down payment would also be good. The more cash you put down on the investment property, the higher your chances of winning the bid.
Also, make sure that you are pre-approved before you begin your property search or make an offer. It shows the bank that you are willing and able to buy the property. Getting pre-approved by the bank that owns the property can give you an advantage. It’s more likely that you will be competing with investors who are paying in cash. Therefore, it pays to have your finances in order.
With that said, being tight on cash shouldn’t discourage you. If you are still considering it and want to learn how to buy bank-owned property with no money down, you can still land a good deal with this financing method. For instance, you can partner with someone else with money.
3. Use Mashvisor to Find Profitable Bank-Owned Properties for Sale
When learning how to buy bank-owned property, one crucial aspect is learning how to find bank-owned homes. There are many ways to find bank-owned properties for sale near you. The best way to find bank-owned properties that guarantee a high rate of return is to use the Mashvisor Property Marketplace. This tool allows investors to search for off-market investment properties in the U.S. housing market including short sales, foreclosures, auctioned homes, and bank-owned homes.
The good thing with this tool is that you can customize your search based on your criteria. This includes listing price, property type, number of bedrooms & bathrooms, cash on cash return, cap rate, and more.
Moreover, the tool allows you to analyze bank-owned homes you’ve found using Mashvisor’s Investment Property Calculator. Using comparable data and predictive analytics, the calculator allows you to do an in-depth analysis in a matter of minutes. This way, you won’t waste time and risk losing your find. You can see the investment property’s expected returns (for both Airbnb and traditional strategies) in terms of rental income, cash flow, cap rate, cash on cash return, and occupancy rate.
Related: How to Analyze Off Market Properties
4. Make a Reasonable Offer
Once you’ve found your ideal investment property, it’s time to make an offer. While bank-owned properties are typically priced below market value, it’s not always the case. Not all properties listed as REOs are automatically great deals. You have to understand that the bank is in the business to make money and will try to price the house as competitively as possible. Unless the house has been on the market for quite a while, it’s not a guarantee that you will be getting a bargain.
Therefore, you will need to get an appraisal to determine the real value of the property and how it compares to the asking price. This way, you can decide whether or not the asking price is fair. Getting an objective value estimate is the best way to know how much to offer on bank-owned property.
You can easily figure out a reasonable offer that is likely to be accepted by the lender by researching recent comparable sales in the area. Comparative market analysis is one of the best ways to determine the fair market value of the investment property to ensure that you don’t overpay or risk your offer being rejected for being too low. If your offer is reasonable and you have a good financial profile, the bank is likely to accept it even if it’s not the highest bid.
5. Conduct a Home Inspection
One of the major drawbacks of buying bank-owned property is that they are often sold “as-is“. This means that the bank probably won’t cover any repairs. If the house needs extensive repairs, turnaround time can be affected. If you are working on a limited budget, spending more than you had budgeted for to get the house rent-ready can adversely impact your returns.
To mitigate this pitfall, it’s crucial that you schedule a home inspection. Unlike buying foreclosed homes, when buying a bank-owned property, you have the opportunity to view it before making an offer, similar to buying from a private homeowner. The purpose of a home inspection is to estimate how much it would cost you to make the investment property livable before taking the plunge. This will protect you from a bad deal. If the renovations are too expensive, buying the REO property may not be worth it.
Related: How to Budget for Big Repairs to Your Rental Property
6. Negotiate the Terms
One question beginner real estate investors normally ask is, “Can you negotiate with a bank-owned property?” There are many myths surrounding this. However, the fact is that it is possible for a real estate investor to negotiate with a bank. If you are getting your mortgage from the lender selling the property, you can negotiate not only the price but also other aspects of the loan like closing costs and interest rates.
However, negotiating with a lender differs from negotiating with a homeowner. Fortunately, there are no emotional attachments to worry about. The downside to it is that banks will often take longer to respond to an offer due to bureaucracy. Your offer is subject to corporate approval. So, you have to be patient. When you get a response from the lender, you are expected to respond without delay to keep the purchase process moving. Your agent will be very helpful during the negotiations.
The Bottom Line
Investing in bank-owned properties can be profitable for real estate investors. Since lenders are usually motivated to sell, they may be priced at a discount. However, it’s not without its fair share of challenges and risks. Thus, it’s important to learn the ins and outs of how to buy bank-owned property before venturing into this territory. Getting a good deal on bank-owned properties is not easy. You need to put in a lot of work. These tips should help to set you up for success with bank-owned properties.
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