It’s not uncommon for both new and experienced investors to ask the same question: What is REO investing? You’ve probably heard the term REO property but never quite understood the process of acquiring such a deal, let alone how much to offer on bank-owned property.
What Are REO Properties?
A bank-owned home is an REO, or real estate owned foreclosure. REO properties are those that have been reclaimed by their original lender: the bank. This means that a bank foreclosed a house, and the property was then unable to sell at auction, so it remained owned by the bank. Banks don’t want these failed mortgages on their records. To get them off of their hands, banks typically sell them at reduced prices. This is a great opportunity for investors to get ahold of undervalued property, but not all REO properties are worth the investment. Don’t feel overwhelmed; this strategy is for anyone interested in pursuing a dream of financial freedom through real estate, even beginners.
Not only do you receive properties well below market value (increasing your chance to profit), investing in REO deals also allows you to buy real estate free of title liens and other claims and will help to diversify your investment portfolio.
How Banks Choose REO Property Offers
Many investors are looking to take advantage of the opportunities that low-priced REO properties offer. This can put banks in a position to create a bidding war between interested investors.
Banks will determine the home’s market value by comparing the price point of similar homes in the area that have recently sold. Then, they will set the price of an REO property either at or under the home’s market value. Each prospective buyer looking to purchase the REO property will submit their offer to the bank, and the bank will choose the highest and best offer.
It all starts with knowing how much to offer on a bank-owned property, so let’s start there.
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How Much Should You Offer On A Bank-Owned Property?
The first step to determining your REO property offer is learning about the property’s financial history. You will want to find out how much the property was originally purchased and how much its foreclosure was priced at auction.
You should also conduct your own market analysis to get an idea of how much similar homes in the area are valued at. Look at recent sales of similar homes within the last few months and active listings in the property market. This will help you determine how much the property is actually worth versus how much it is listed for by the bank.
Keep in mind that the bank will not make any repairs to the property, so you will need to account for the cost of any repairs and renovations the property may need before you can sell it. This should be accounted for in your evaluation of the property’s value.
Researching the listing agent may provide additional insight, as many agents specialize in bank-owned properties. Look up properties the listing agent has sold in the past several months with the help of your own agent. Compare the listing prices to the final sale prices, as this will provide more context to their experience and the market. This can help you decide if you need to make a higher or lower offer.
It’s also wise to know how many other bids will be involved in the REO property sale. If there are many bidders on one property and you submit a low offer, there is less likelihood that it will be accepted. You will have the opportunity to raise your offer if higher bids come in, but be sure to use your market analysis to prevent you from bidding more than the home is actually worth.
Finding Foreclosed Homes For Sale
There are many different ways to find foreclosed homes for sale, including on the MLS. The word “foreclosure” may not always be in the title, so always read the description when searching for these homes. Real estate investors can also search bank office websites and other online listing services for possible foreclosures. Many banks have dedicated web pages to foreclosed homes. There are also specific websites that focus on foreclosures, search for your market area online and see what is available.
The newspaper and other local printed materials typically print foreclosure information as well. Read these materials regularly as you search for foreclosed homes for sale. Finally, you can ask around your network for more information. Often, real estate agents and brokers are aware of foreclosures in the area.
4 Ways To Make Your REO Offer Irresistible
Investing in REO properties is a great addition to any investment portfolio, and also has the potential to help you profit big time. However, if you’re offer never gets accepted, you won’t be able to take advantage of the benefits. Help your bid be chosen every time by adhering to the following tips:
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Offer a quick closing
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Forego an inspection
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Pay in cash
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Be unique
1. Offer A Quick Closing
Fortunately for investors, a bank-owned property comes with a highly motivated seller. Why? Because banks want to rid themselves of these money-sucking homes as quickly as they can.
Whether you’re new to real estate investing or a seasoned pro, you should be well aware of the benefits that come with motivated sellers. Motivated sellers are exactly that: motivated to sell; they are typically more willing to negotiate terms (like a lower selling price) if you can close their deal fast. Banks and REO properties are the same way.
The average closing window to complete a deal is approximately 30 days. Because you are (most likely) receiving a great price for this property, closing in less than 30 days should be no problem. Luckily, while it is easy for you, it’s often enough to impress the bank. Consider offering to close in five days. While this may seem like an obscenely short amount of time, it is worth making a shocking bid to entice the bank if, of course, you have the funds. Chances are, the bank won’t be able to process the sale in a week. But you’ll come out looking like the hero (with a new rehab or wholesale property to show for it), and the specific lender may be more likely to want to work with you in the future.
While offering a quick close won’t necessarily guarantee the sale, it will definitely give you an edge over the competition.
2. Forego An Inspection
Similar to offering a quick close is foregoing an inspection process. Why? For the same reason that banks want to sell: they want to sell fast. While an REO property can be extremely beneficial to an investor, these properties can be a huge drain on a bank.
The advice to do without an inspection is not something you will hear often; however, if you’ve found a property you know you can profit from, offering to skip the inspection process is a great way to entice the bank. If you choose this route, it’s vital to note the importance of minding your due diligence. The property must be a low enough price to where you can still profit, supposing the worst of the worst occurs (think foundation damages, roof leaks, mold, etc.).
Keep in mind, an inspection is a contingency, not a requirement. Meaning, if you assess the property before you make the bid, you can skip an official inspection to make your offer shine. Banks will appreciate the less work involved on their end, and you have a better chance of reaping the reward.
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3. Pay In Cash
If there’s one thing to be sure of, it’s that cash is king, especially in the eyes of a bank that possesses an REO property. You may have the best offer letter in the world packed with beneficial contingencies for the selling party, but they mean nothing without cash. If you’re ready to put cash (or the equivalent) on the table, your offer will be next to impossible to pass up.
Several successful investors attend REO auctions with their pre-qualification letters direct from their hard money lenders ready to buy the property. While these investors can be great candidates, usually offering full (or close to full) asking prices, they cannot compete with cash buyers. In fact, I am personal friends with an investor who checked the MLS only to find that a number of the REO properties he was after were sold for less money to investors offering cash.
If this option is possible for your budget, paying in cash is a sure-fire way to stand out. Bring a physical statement from a line of credit that proves you have the funds next time you meet with a bank selling an REO property and watch a dramatic improvement in your results.
4. Be Unique
There are certain occasions where doing things “by the book” can actually hurt your chance of getting an offer accepted, especially in the case of REO deals. Some unique examples include.
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Offer an obscure number: When banks are sifting through the offers for, say, a $100,000 property, they see a lot of the same thing over and over again. If they come across an offer like $100,158, chances are you’ll stand out. At this point, the bank will be more willing to read through the rest of your offer.
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Split Fees: There are other fees, aside just the cost of the property, associated with closing an REO deal. Transfer fees, escrow fees, and title insurance fees are just a few examples. Offering to split these costs will prove to the bank that you mean business.
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Submit a pre-approval letter: While this may sound obvious, not everyone will submit a pre-approval letter from their lender when making an offer. Be sure to keep in mind that pre-qualification and pre-approval are two entirely different things. A bank won’t care if you’re pre-qualified; they want to know that if they accept your offer, that you’ll be ready to go.
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Be Friendly: Who says that buying foreclosed properties has to be a serious transaction from start to finish. Despite negative stereotypes, bank lenders are people too. They have families and hobbies and probably like to talk about them. Get to know the banker you’re working with and humanize the experience. If the bank has it narrowed down to two offers, who do you think they’ll choose? The investor who forgot their name, or one who asks about their wife and kids?
Financing A Foreclosure Deal
There are several ways to finance a foreclosure deal, including with a traditional mortgage. While some lenders may be hesitant to provide a loan for a foreclosure property it is possible. Buyers may also be interested in reviewing 203(k) loans, the Freddie Mac HomeSteps program, and Fannie Mae’s HomePath ReadyBuyer program. Read more about these government-backed financing options:
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203(k) loans: These loans allow buyers to finance a foreclosure property and any necessary repairs in once mortgage. There is a mortgage insurance premium attached, but buyers can borrow up to $35,000 more than the purchase price for repair costs.
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HomeSteps: While HomeSteps is only offered in specific states, buyers who are eligible may be able to completely avoid mortgage insurance. HomeSteps loans do not request appraisals during the loan origination process, and buyers can purchase different property types if they are interested.
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HomePath ReadyBuyer: If you are a first-time buyer, this program could help you purchase a foreclosed home owned by Fannie Mae. The loan requirements involve a mandatory education course on homebuyer. Two benefits of this option include low earnest money requirements and private mortgage insurance that automatically cancels once equity reaches 20 percent.
Buyers interested in foreclosure deals should also consider more creative financing methods, such as private money lenders. These options can provide a faster approval timeline, allowing you to move more quickly when the right foreclosure deal presents itself.
Summary
REO properties are a great low-cost opportunity for investors of all skill levels. However, the prices can create some competition among buyers. Learning how much to offer on a bank-owned property can help you place offers that are impossible to refuse. Remember that a quick closing and unique number can help you stand out. Consider these tips before meeting with your banker to boost your chances of securing an REO property and an opportunity to profit. With the right conditions, you may find yourself the owner of an undervalued investment property.
Have you ever purchased an REO or bank-owned property? Share your tips for landing these deals in the comments:
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