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Investing in bank owned homes has become synonymous with today’s greatest real estate strategies. Otherwise known as REO (real estate owned) properties, bank owned properties are just that: homes that are currently “on the books” of banks or traditional lending institutions. It is worth noting, however, that most banks would rather not hold on to any properties (especially those that have been deemed non-performing assets). Instead, they would rather sell them to the next buyer, which — if you play your cards right — could be you.
What Are REO Properties?
REO properties are the homes that have been repossessed from borrowers that were unable to keep up with mortgage obligations. In other words, when a homeowner falls behind on mortgage payments, they become subject to foreclosure. To be clear, foreclosure is an action; one lenders take when repossessing a mortgaged property from a homeowner that has failed to keep up with contractual mortgage payments, but I digress. Bank owned homes are not foreclosures; they are the properties that go through the foreclosure process but fail to sell at auction. While there are only subtle differences, they are important differences, nonetheless.
Once the bank takes a property through foreclosure, it then tries to recoup losses at auction. You see, banks lose money when their borrowers can’t pay their loans, so they must make up for the missing revenue by selling the property at auction. In selling the home at auction, banks may be able to recoup a good portion of the amount they were owed by the original borrower. However, there are many reasons homes may not sell at auction, and it’s those homes that become the topic of today’s discussion.
REO properties are those homes that have been foreclosed on, repossessed by the original lender, put up for auction by the lender, and subsequently failed to sell to a new buyer. In other words, bank owned homes are bank owned because they can’t get rid of them. That’s why they are called bank owned homes; the bank literally owns them.
It is important to note the banks intentions, however. While the original lender may have repossessed the property in an attempt to recoup losses, they certainly have no intention of holding on to said property. Banks are in the business of lending money and collecting interest; it’s a great business model that has done them well for quite some time. That said, banks are not in the business of holding on to properties, especially if they aren’t “performing.” When a bank repossess a home, it is more of a burden than an asset; it is essentially a drain on their bottom line because it’s simultaneously costing money and not bringing in any revenue.
Banks call them nonperforming assets because they are exactly that: assets with potential that aren’t being exercised. Therefore, banks would rather remove said properties from their books, and that’s where savvy investors come in. If you play your cards right, you might be able to acquire a good deal from a motivated bank and create what many like to call a win-win.
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Investing In Bank Owned Homes
Investing in bank owned homes, not unlike every other acquisition strategy you are probably familiar with, has more to do with the owner’s motivation than anything else. You see, investing in real estate has one fundamental principle: buy low and sell high.
Fortunately for investors, banks are motivated to sell their nonperforming assets, which could result in quite the deal for those that can find them. Since banks would rather not hold onto the homes they repossess, they are typically eager to sell them off — even if that means selling it for a little less than it’s actually worth. And therein lies the true benefit of investing in bank owned homes: the banks’ motivation to rid themselves of homes could work in favor of investors.
Of course, banks aren’t stupid; they know the value of each asset they have in their possession. More often than not, they are going to try and get full price for the home in question, but that doesn’t mean you can’t negotiate better terms. Again, banks would rather sell their inventory at a discount than hold on to it and absorb the costs that coincide with maintaining a property. More often than not, banks will be willing to negotiate terms that favor both parties. That said, investors who can navigate the REO process stand a better chance at acquiring deals at good prices.
If you are interested in investing in bank owned homes, there are five essential steps you must complete:
1. Inspect The Property: Bank owned homes are typically sold “as is,” meaning that you will buy it in its current condition. Since most REOs are distressed to begin with, it’s reasonable to assume the home will need some work. That said, you will want to inspect the property to know exactly what you are getting into. There is a good chance you will need to put some money into it to increase its value, and it’s best to know how much ahead of time.
2. Perform A Title Search: Be sure to search the home for liens and outstanding debts. I recommitted hiring a title officer to make sure there are no surprises when the time comes to make a purchase. If there are, in fact, liens against the property, you my find yourself paying them in order to buy the house. Banks should usually clear liens before you get to this point, but you should never assume. It is at this time you want to make sure you know what you are buying into with a title search.
3. Negotiate Favorable Terms: Remember, banks don’t want to hold onto nonperforming assets, but they also aren’t going to give homes away. Instead of initiating negotiations with a low-ball offer, give them a reasonable one; one that reflects due diligence and is substantiated with the data to prove it. Only then will you be able to negotiate a better deal on your behalf.
4. Make An Offer: Again, don’t assume you can offer the bank nothing for something. Submitting a laughable offer is more likely to move your request to the bottom of the pile than anything else. Instead, give them a fair price, but support your relatively low offer with data from nearby comparables and assumed construction costs. In submitting an offer, be sure to complement it with what I like to call an REO packet. The packet should include a great deal of research: comparables, repair costs, how much the home is costing the bank, etc. This is your chance to convince the bank they should sell to you, so give them numbers to support your offer.
5. Finance The Deal: A good REO investor will have financing lined up before they even find a property. I recommend having a hard money lender on hand; that way you can submit an offer in cash, effectively moving your offer to the top of the pile.
The Real Estate Auction Process
The real estate auction process, as its name suggests, witnesses lenders place the homes they have repossessed from delinquent homeowners up for auction. In an attempt to recoup the losses from homeowners that have failed to keep up with mortgage obligations, the banks will take the homes they repossess and try to sell them at auction. Not unlike REO properties, homes bought at auction can represent a significant discount. However, there are certain caveats depending on the auction you attend.
A lot of auctions sell the homes “as-is,” and some may simply not be worth the investment. Others may not even let you see the condition of the property before you bid. Having said that, there are a number of reasons homes may not sell at auction. And it’s the ones that don’t find a buyer that end up as bank owned properties. You see, to become a real estate owned home, the property must first make it past the auction process without being purchased.
How To Find REO Properties For Sale
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Online REO Directories
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Real Estate Brokers
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Local Bank REO Departments
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Government Loan Insurers
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The MLS
Understanding how to find REO properties is not all that difficult, as long as you take advantage of all the resources available to you. The best place to start is often with your network, more often than not finding a deal near you is all about asking the right people. Finding an REO deal may be as simple as walking into your local bank and asking them what they have. In the meantime, you may even find online search tools to be beneficial in your area. Online REO directories or MLS may be particularly helpful in your area. Make use of search filters and designated bank websites as you look for new opportunities.
Making REO Offers
Nothing is more important to making REO offers than understanding your place as an investor. If for nothing else, you can’t simply march up to a lender and expect them to entertain a “low-ball” offer. To do so would almost assuredly prevent you from making a deal. Remember, banks know how much their REOs are worth, and they are not going to give them away for pennies on the dollar. What’s more, it’s safe to assume you aren’t the only investor contacting the bank for a peek at their inventory; there’s a good chance other investors are interested, too. So again, know your place. Instead of initiating your negotiations with a laughable offer, think about going into negotiations pragmatically. You need to convince the bank that you are their best option, which begs the question: How?
First, you want to make an offer that the bank will at least consider entertaining. Instead of offering the lowest price possible, try offering slightly more — but not too much. That way, the bank will view your offer as a viable candidate and — perhaps even more importantly — favor it over the competition.
I maintain that it’s in your best interest to offer slightly more than the bottomline. After all, if the numbers make sense, it’s better to acquire the deal at a slightly higher price than not to acquire it at all. While it may sound counterintuitive for investors to offer more than the bare minimum, I can assure you it’ll work in your favor if it helps you land the deal, especially if the home has potential to make a lot of money on the backend.
Outside of the offer, you will want to do your homework. Mind due diligence and put together a packet that will help your case for acquiring the home at the price you want. Research nearby comparables, highlight how much work needs to be done on the home, and come up with a reasonable price point. I would even go as far as suggesting how much the home is costing the bank if they continue to hold onto the property. Compile all if the information you gather into a packet and provide it for the bank with your offer.
And don’t forget, you can always use the packet to negotiate better terms. As long as you can support your offer, there’s no reason not to. You would be surprised with how motivated some banks are to move inventory.
Can You Negotiate REO Properties?
I want to make it abundantly clear: it is entirely possible to negotiate REO properties. Again, banks do not want to hold onto homes that aren’t bringing in any money. As a result, they are typically willing to entertain negotiations. There’s no reason a savvy investor can’t negotiate any one, or all of the following:
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A lower down payment
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A lower interest rate
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A reduction in closing costs
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A lower asking price
Investors can negotiate just about anything, as long as the bank sees it as a viable reason to rid themselves of the property.
Bank Owned Property Financing
Provided you want to finance through the bank you are currently dealing with, there’s a good chance they will loan the full price of the loan if your credit is deserving. However, bank owned property financing can also be made possible through the help of private and hard money lenders. While these individuals will come with a higher interest rate (and sometimes additional points), the duration of the loan and the speed of implementation in which they offer will almost always work in your favor. If for nothing else, offering cash for a bank owned home is about as attractive as it gets for lenders, and hard money lenders can allow you to do just that.
Can You Use An FHA Loan To Buy A Bank Owned Property?
I wish I could tell you the answer was as simple as the question, but that doesn’t appear to be the case. At the very least, the answer is a maybe, and is entirely dependent on the bank selling the home (and the home itself). In other words, you might be able to use an FHA loan to buy a bank owned property. If the lender is willing to work with the Federal Housing Administration (FHA), you might be able to secure an FHA loan. That is, of course, if the home passes FHA qualifications to receive a loan in the first place. In short, it’s possible to buy an REO property with an FHA loan, but there are a few more hoops to jump through.
Summary
Today’s most prolific investors know it, and it’s about time you did, too: investing in bank owned homes is a great way to simultaneously reduce acquisition costs and increase profits. Of course, that’s only possible if you know how to find and acquire REOs from the institutions that are currently holding them. That said, if you can navigate the REO waters with a high degree of success, you could find your investing career take off.
Have you had any luck investing in REOs? How did the process work for you? If you could have used this guide, or know of anything we left out, please feel free to share your thoughts in the comments below.
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