Buying REO properties, for one reason or another, has become a polarizing subject in the real estate investing landscape. Seasoned experts are most likely aware of the advantages they provide for those that mind due diligence, but new investors tend to keep their distance for fear of the unknown.
It’s worth noting, however, that REOs have become synonymous with some of today’s greatest deals. And if new investors could simply step out of their comfort zone, they too will realize just how beneficial buying REO properties could be for their own business. Let’s take a look at three of the biggest reasons investors should consider buying REO properties in 2017 and beyond.
Why Buying REO Properties Should Be On Your Radar
In order to better understand why buying REO properties should be on your radar, perhaps it’s time to understand exactly what they are. For starters, REO stands for real estate owned. As their name suggests, REOs are typically owned by traditional lending institutions (banks). But where did they come from? What path did they take to become REO properties?
Put simply, REOs are those homes that have been repossessed by banks after the owners were unable to comply with mortgage obligations. In the event a homeowner fails to keep up with their mortgage payments, the bank that originated the loan will foreclose on the property and take control of it. In an attempt to recoup any lost revenue, the bank will try to sell the home at a foreclosure auction. If the home fails to sell at auction, it will sit on their books as an REO.
In knowing where they came from, it’s a lot easier to learn how to buy a bank owned property. Let’s take a look at three distinct advantages REO properties offer investors:
1. They Are Void Of Title Discrepancies
It’s unfortunate, but a reality nonetheless: title discrepancies are all too common in the world of real estate investing. For more reasons than I would care to recognize, it’s entirely possible for a subject property to carry unwanted baggage that calls into question the legal owner. From liens and unforced errors in public records to title discrepancies, there are a number of reasons that can impede a prospective buyer from taking ownership of a property. What’s more, any issues casting shade on the status of a home will need to be addressed prior to taking ownership of a respective property.
REO properties are rarely accompanied by title discrepancies. If for nothing else, the bank responsible for the repossession will immediately extinguish any liens against the property and make sure that taxes are brought current. That way, there are no questions regarding the status of a subject property. It’s safe to assume REOs are free and clear of government and municipal liens, HOA liens, tax burdens and anything else that could impede an impending transaction. Those buying REO properties will usually be able to do so with a clear conscious, and an even clearer title.
2. They Award Leverage To Savvy Investors
Everyone knows the secret to negotiating a great deal is working with a motivated seller, and buying REO properties are no exception. Banks are highly motivated to rid themselves of the homes they repossess, and those investors ready to take advantage of the opportunities they offer will be rewarded accordingly.
Remember, banks aren’t in the business of holding onto properties. They make their living by charging interest on the money they lend out; not by holding on to what are otherwise non-performing assets. Properties that aren’t currently generating interest for the bank are a liability to their bottom line. Homes sitting on the books of the banks that repossess them cost money to maintain, and banks would rather not have to deal with such an unnecessary expenditure. What’s more, the longer they hold onto them, the more they are eating into their bottom line.
Since time is absolutely of the essence, there is no reason a savvy investor can’t leverage the bank’s urgency to their own advantage. It’s entirely possible, provided you can make the case, for a bank to lower their asking price to facilitate a timely transaction. And while said leverage may not always result in a cheaper price point, it’s entirely possible that it can help in landing a deal that was otherwise unobtainable. That’s right, a price adjustment isn’t the only thing leverage can help you attain. There is no reason to believe the bank’s willingness to sell won’t result in your latest deal. Just know this: banks want to sell you REOs just as much as you want to buy them.
3. They May Make Concessions For The Buyer
More often than not, buying REO properties will coincide with “as is” pricing in order to expedite a sale. It’s worth noting, however, that “as is” may be relegated solely to the price, and nothing more; that’s a big distinction to make. And where most people see “as is” as an obstacle for real estate negotiations, savvy investors see opportunity. At the very least, “as is” labels suggest a sense of desperation — one that can certainly be exploited.
It’s safe to assume there will be little room to negotiate a cheaper price when buying REO properties, but that doesn’t mean you can’t get the bank to make a few concessions of their own. Remember, the bank is in no hurry to hold on to the properties they repossess. And while they certainly won’t give them away, they are willing to meet somewhere in the middle on more than a few things.
It’s entirely possible to convince the bank to cover a few of the costs you may inherit. I’ve seen banks promise to reimburse those buying REO properties for things like termite inspections and appraisals. Perhaps even more impressively, I have seen banks pay for the costs of any renovations needed to address faulty or dangerous living situations. In the event a home presents a threat to anyone inside of it, the bank won’t be able to sell it. That said, there is no reason you shouldn’t be able to get the bank to cover the necessary upgrades in order to bring a home up to code. You would be surprised at what a bank will do for prospective buyers if it means they can sell an REO.
The Bottom Line
I maintain that there are certainly impressive benefits to buying REO properties. However, investors need to understand that the process for buying bank owned real estate isn’t their own; it’s the bank’s. Traditional lending institutions have been selling REO properties for many years, and they have a method in place that isn’t likely to disappear anytime soon. That said, the idea is not to disrupt their strategy, but rather conform to it.
Remember, you will most likely be competing with others to obtain any properties you come across on the books of banks. It’s in your best interest to appease them by offering what they will expect. Generally speaking, the banks will always choose the path of least resistance; be sure that you are that path. Don’t hesitate to give the bank what they want. In fact, it’s not uncommon for investors to have to pay more when buying REO properties. And while most investors will scoff at the idea of paying top dollar for a property, the price point is rendered moot if the numbers work. All that matters is whether or not you can make money on the back end of a deal. Only pursue a subject property if it makes financial sense. If that means paying a little more up front to secure the deal, feel free to do so (as long as the numbers work). Just know this: buying REO properties may be the best decision you make in 2017.
