REO properties are real estate owned by the bank. An REO is different from a foreclosure property in that the bank, or lender, has already tried to sell it at a foreclosure auction, but could not receive sufficient bids. As a result, the bank then became the owner of the property. Generally, lenders are very motivated to sell these properties, as they are in the business of lending money, not owning real estate. REO’s tie up their capital reserves and hamper their ability to lend money. Also, the management of these properties can become very costly. This is the best opportunity to find a good deal.
Benefits of buying an REO over a foreclosure
Because the bank needs to sell these homes quickly to satisfy shareholders, they will offer greater incentives to buyers. Some of those incentives may include:
- Savings of up to 20% off the market value of the property
- Market an REO purchase as the most simple way for first time homebuyers and experienced investors to buy properties
- Give prospective buyers immediate access to the property for home inspections
- Remove all back taxes and liens
- Allow negation on rehab costs, interest, closing points, loan amount, etc.
- Accept a less than normal down payment
- The bank will evict the tenants for you and remove any existing liens
REO vs. Foreclosed Property
When you are thinking of buying an REO you have two distinct advantages that a buyer does not have with a foreclosed property. The first is that you are able to buy on your schedule, as you do not have an auction date to work with and around. You can make an offer of the home any time; you don’t have to wait for bidding to begin. Another big advantage of an REO compared to a foreclosed property is that you can inspect it before you buy, when you cannot do this with the majority of foreclosed homes that you think about purchasing. Being able to inspect the property before you buy will let you know how big of a project you will be dealing with.
Why Bank Owned REO Properties are so CHEAP
Basically, a bank is not set up to deal with real estate. Sure, they give loans to people, but really, they are not equipped to buy and sell real estate. Because banks are not accustomed to dealing with real estate, it often takes them awhile to get the ball rolling so that they can repair the property, and get an agent to sell the property. What this means is that while the bank attempts to get their business together, they are losing money readily.
Because the bank is loosing so much money on each REO, they are willing to sell it fast and cheap. In fact, banks commonly sell an REO property for around 30% of its value just to be done with it. While they may end up losing money on the deal, they actually end up losing less if they sell cheap now than they would if they kept the property for another six months while they try to pull everything together so that they can sell the property.
The great thing about working with the bank with an REO is that you aren’t buying site unseen. Because you can walk through the house and make all the inspections that you want, you can deal with them in a way that will give you the best deal, and the bank will typically be happy with any serious offer because it will get the house off of their hand and they will stop losing money.
Generally REOs are a great investment as long as you know what you are getting into. The bank simply wants to get rid of these homes, and if you find the right property and are ready to make the serious investment, it can be a great way to get off and running in the real estate business.