A big sector in the market that is often overlooked by real estate investors is bank owned properties. Investing in something like an REO occupied property could be a great opportunity. But if you want to get it right, you need to understand exactly what you’re getting into. Let’s start by explaining exactly what it means for a property to be REO occupied.
What Is an REO Occupied Property?
“Real estate owned.” An REO property is one that has had its ownership transferred to the bank or another lender. It’s a term often used to describe foreclosures. When a real estate property is secured by a mortgage, and the borrower doesn’t make the mortgage payments, it can eventually be repossessed by the lending bank. Foreclosures are typically the last resort so there are multiple steps before a property with a defaulted mortgage becomes real estate owned.
How a Property Becomes REO:
- First, the borrower (homeowner) defaults on their mortgage payments for a period of time, accumulating a high level of debt.
- The lender must take legal action, and starts the foreclosure process.
- Once the property is officially foreclosed on, it goes up for sale in a real estate auction. It is sold to the highest bidder, whether that be a third-party or the bank itself.
- If a third-party is the highest bidder, they must pay in cash or a cash equivalent, and the title to the property is transferred to them, while the bank recoups a fraction of the cost of the outstanding loan balance.
- Sometimes the property doesn’t sell to a third-party or the lender ends up being the highest bidder (banks can credit bid as high as the total outstanding loan balance plus foreclosure fees). When ownership is transferred to the lender, the property reaches REO status and is officially real estate owned.
Foreclosures aren’t fun for anyone involved, but there is a bright side to everything; smart real estate investors just need to know how to act on this potential opportunity. It’s pretty obvious why some investors/homebuyers might be interested in real estate owned properties. They aren’t everyone’s first option, so the competition between buyers isn’t as high. REO property typically also comes at a discount, so you’ll be paying far less than what a regular property in that market is valued at.
Related: How to Buy a Foreclosure in 5 Easy Steps
What Does REO Occupied Mean?
It isn’t always a homeowner in financial distress who loses their primary residence when a bank forecloses a property. Sometimes, this REO property could be an active rental occupied by tenants. When this is the case or the previous owner doesn’t vacate the property, it’s called an REO occupied property.
What happens when a bank repossesses a rental property with tenants? Depending on the tenants’ status and their rights in that state, the outcome could differ. Either the lender or a hired REO property manager will proceed with the necessary steps. One course of action they can take is to offer a cash-for-keys deal to motivate the tenant to leave the building before eviction.
This is when the new property owner (the lender in this case) offers the previous resident/tenant a lump-sum as an incentive to move out voluntarily in order to avoid a costly eviction process. The tenant will accept the funds (which can range from a couple hundred to a couple of thousand dollars) and in exchange, they will vacate the property at the agreed-upon time.
If you’re planning on buying an REO occupied home, you should know what rights the current residents of this home have. Some states and local legislations have given tenants more rights when it comes to their status in an REO property. Tenants occupying foreclosed properties can check if they’re in bona fide status, as the Protecting Tenants at Foreclosure Act applies to them. This allows tenants to
- remain in the REO occupied rental until the end of their lease
- have longer notice periods to vacate the property
Once the lender reaches an agreement with the tenants of this REO occupied home, and it is vacated, it can go up for sale. Banks will typically put an REO occupied house up for sale as soon as it’s vacant, as to get it off their books quickly. Real estate investors interested in buying an REO occupied property should double-check any contracts signed to make sure they won’t be stuck with tenants who didn’t honor any vacancy agreements.
How to Buy an REO Occupied Property
With any real estate investment decision comes its pros and cons. When it comes to buying bank owned property like an REO occupied home, the transaction can differ from a regular home purchase. To benefit from the pros, and minimize the effect of the cons, we recommend you follow these tips:
Evaluate the Property’s Value
You always want to get an accurate estimation of your investment property’s value before buying. But this is especially important when buying REO properties. Real estate investors need to consider future price trends to get an estimation of how much value this occupied property can gain. Researching recent sales of real estate comps in the same market can help determine the value of your REO occupied property.
Study the Neighborhood
What is the condition of other homes on that block? If there is a high concentration of REO occupied homes in the same area, that could mean there’s a bigger problem to consider. A bad neighborhood could negatively affect your investment’s value, whereas a well-kept neighborhood usually comes with other positive factors.
Estimate Renovation Costs
Calculate how much any necessary repairs will cost you. Because lenders typically sell REO occupied properties in “as is” condition, the new property owner might have some renovation to do. If the home is occupied, it could go either way. This might indicate that because someone is living in it, they are maintaining it well. Or maybe because you’re asking the tenant to vacate, they won’t care about damaging the property. Whatever the situation is, it’s always important to realistically estimate the cost of repairs. You don’t want to invest in REO property thinking it’s a great real estate deal, only to end up with some major repair costs down the road.
Related: Real Estate Renovation: How Much Will It Affect Your ROI?
Choose a Vacancy Strategy
Decide if you want to continue leasing this property to its current tenants. If the lender left the task of vacating the tenants up to you, you can move forward with the proper legal proceedings. If you were planning on holding this investment property as a rental, you can keep the tenants. Just get some help from a real estate agent or property manager to put together a new lease and to determine if they’re good tenants to keep.
Related: 5 Real Estate Investing Life Hacks to Make the Eviction Process as Painless as Possible
Real estate investors can find a great investment with REO occupied properties. Are you wondering how to find REO properties? You can visit the Mashvisor Property Marketplace to easily find off-market properties like foreclosures and bank owned homes for sale. Check it out.