If you are just getting into real estate investing, you are going to come across some complex and, sometimes, confusing terms that you are not familiar with. However, as a beginner real estate investor, it’s prudent that you make a conscious effort to understand some of these terms. After all, you may have to deal with them at some point. If you are looking for distressed properties for sale, there are two terms used in the real estate marketplace which can be confusing: REO vs foreclosure.
You might have heard these terms floating around in your real estate circles. While they are related to some extent, they have some key differences. Here’s our guide to REO vs foreclosure investments.
What Is a Foreclosure?
Foreclosure is a legal process that occurs when a homeowner fails to make their mortgage payments and has not exercised other options to try and stop the foreclosure process. Therefore, the mortgage lender retrieves the property and tries to sell it to recover the unpaid part of the mortgage. Let’s take an in-depth look at this process:
If the homeowner misses mortgage payments, the lender will provide them with a Notice of Default. They will have a grace period to work out financial arrangements before a foreclosure can be initiated. The foreclosure process is often a costly and time-consuming process for the mortgage lender. Therefore, they often try to work with property owners to avoid foreclosure through other arrangements. The options may include loan modifications, repayment plans for the previous due mortgage payments, or a short sale.
If the borrower still can’t make up for the missed mortgage payments and other options fail, the property is sent to foreclosure auction. Unlike in a short sale, when the mortgage lender has begun the foreclosure proceedings, the homeowner forfeits his/her rights to the house. Therefore, he/she ceases to be a party in the sale. If the property is not sold at auction, the mortgage lender will take possession of it. At this point, it becomes an REO property.
Buying a Foreclosure
Buying foreclosure properties has several disadvantages for a real estate investor. First, they have to be paid for fully in cash at the time of the auction. Mortgages aren’t allowed. The good side of this is that competition is reduced.
Related: 6 Benefits of Foreclosure Investing
While the prices of foreclosed homes may be below market value, they are usually sold “as is”. Some of them may not be in good condition because of neglected maintenance by the previous owners. Since the properties are not available for inspections prior to the foreclosure auction, it becomes hard to know the condition of the investment property you are buying.
The properties may also have title problems. The winning bidder will be required to pay any unpaid taxes or other liens on the property. Therefore, buying a foreclosure can be very risky if you lack real estate experience.
What Is an REO Property?
An REO (Real Estate Owned) property, also referred to as a bank-owned property, has already gone through the foreclosure process and the mortgage lender or bank has taken ownership of it as a result of a failed foreclosure sale in an auction. The bank becomes the owner of the property. After taking ownership of the property, the mortgage lenders may try to sell REO properties by listing them online or on their websites.
Buying REO Properties
If you are thinking of buying REO property, here are some of the reasons to consider them:
REO properties are typically sold below market value and at lower prices than foreclosures in a move to make them more attractive to buyers. The longer the lender owns it, the more money they lose. It’s in their best interest to sell the property as fast as possible and invest the money.
You can perform home inspections
REO properties are sold “as is”. However, prospective buyers can access the property and inspect it.
No back taxes or liens to worry about
When it comes to buying REO homes, there are no liens, taxes, or tenants to worry about. The bank will often provide a clear title that is risk-free.
You can negotiate for better terms
Since the lender is looking for a quick sale, you can negotiate closing costs, loan amount, down payment, interest, rehab costs, etc.
REO vs Foreclosure: Which Is Better?
Both REO properties and foreclosures can offer substantial discounts to real estate investors compared to normal property listings. When it comes to buying distressed properties, many investors prefer buying REO properties. Generally, foreclosures seem to have more negatives than positives. But, which is the better real estate investment? Well, the answer to this question is relative. You need to weigh the pros and cons of REO vs foreclosure investments to know which one works for you.
You also need to look at the specifics of each investment property. Buyers must proceed with caution and do their due diligence. If you know how to find REO properties that are profitable, it can be a good real estate investment strategy. Likewise, you have to know how to find foreclosures that would yield a good return on investment to be successful with this strategy. If you are looking to buy a foreclosure or an REO property, there are many ways to do your search. However, the quickest and easiest way is to visit the Mashvisor Property Marketplace.
Using the Mashvisor Property Marketplace
The Mashvisor Property Marketplace provides real estate investors with access to a variety of off market properties for sale, including foreclosed homes and REO properties. You can customize your investment property search to fit your criteria by using filters such as:
- Property type
- Rental strategy
- Number of bedrooms
- Number of bathrooms
- Listing type
- Cash on cash return
- Cap rate
Moreover, you can do a comprehensive analysis of the properties on the platform using our investment property calculator. With this tool, you will get key numbers like rental income, cash flow, cap rate, cash on cash return, and Airbnb occupancy rate in a matter of minutes.
Learn More: The Best Tool to Find Off Market Properties
The Bottom Line
REO and foreclosure homes are related in some ways in that they are part of the overall foreclosure process. As a real estate investor, it’s important that you understand how they differ from each other in case you want to purchase distressed real estate or are faced with a foreclosure. Hopefully, you now have a clear understanding of the difference between an REO vs foreclosure.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.