Are REO Investment Properties Right for You?

REO Investment PropertiesIf you are getting involved with real estate in Mammoth Lakes you may have heard the term REO without really knowing what it refers to and how it could play a part in your current an/or future real estate investments. REO is actually just an acronym that stands for real estate owned by the bank. REOs are becoming more and more popular with the increase of foreclosures due to homeowners not being able to make their mortgage payments. This is unfortunate for some, but by result, you can really cash in on some great foreclosure opportunities.

How Does a Property Become an REO

When a bank forecloses on a home or property owner, it is requires by law to hold a public foreclosure auction. Sometimes, because of lack of publicity or other reasons the home will not get any bidders at the auction, and the bank will end up owning the property. When the bank ends up owning the property it is then known as an REO, real estate owned by the bank. An REO isn’t something that the bank wants, but as consequence they are put in a position to manage and eventually sell the property to cover there initial investment.

Reasons the Property was not Bid on at Public Auction

There are a variety of reasons that a piece of property will become an REO.

  • The most common reason is that the property had very little equity in it. Many investors will not bid on a property that has less than 30% equity. In fact, statistics show that banks end up with most houses that do not have at least 30% equity.
  • Many properties become REO when the property was simply in terrible condition. Most investors or individuals won’t invest in a home that is in poor condition because they see it as too risky. When a property that is in poor condition becomes an REO they are often gold mines waiting for the right investor to come along.
  • Another reason that homes are not bid on at an auction is because there are IRS liens attached to the property. The problem with IRS liens is that there is a 120 day period after the purchase of the home that the IRS has the right to take the property and refund the money that you have paid for it, but not the money you have put into the house updating it. For some investors, this 120 day redemption period is just too risky.

Why Banks Want to Get Rid of Their REO Inventory

Banks do not want to own property, it is not what they are set up for. Basically, an REO property is the sign of a bad loan that was given by the bank and the REO is a liability, not an asset. Every month that a bank owns a piece of property means they are losing money.

  • One of the biggest reasons that a bank does not want an REO is that their insurer will make them pay a full or partial settlement on the property.
  • The bank is also aware that it doesn’t matter how much they sell the home for at an auction, they will probably suffer a loss. Banks are actually penalized for having too many REOs by the federal government, as they have to borrow funds from the government to stay in business. The federal government views the REO as a bad loan, and has a vested interest in making sure that a bank does not make too many bad loans.
  • The bank will also have costs that are associated with the property such as taxes, insurance, sewer, water, and electricity bills, as well as homeowner association dues. The property must also be maintained and winterized, all of this costing the bank money.
  • Another problem for the bank is that it is not used to having to deal with the fixing and selling of real estate. Banks don’t have contractors and such on hand to do the repairs, so they are at the mercy of contractors that may charge them too much for the services due.
  • It also takes time to make a house marketable, and all of this time they are paying the costs to upkeep the property, when they aren’t used to doing so.
  • The bank will usually hand the big task of managing and selling an REO to an asset manager, but this too can be a logistical challenge due to the shear volume of REO properties that need to be managed.

The bank must also pay to hire a local real estate agent to sell the property once it has been repaired. While this may not seem like a big deal to most people, it can add up when the bank is expected to pay at least 6% of the sales price to a real estate agent for every REO! These costs really add up over time, so it’s plain to see why the bank simply does not want an REO.

REO Properties Pose a Great Opportunity for Real Estate Investors

Most real estate investors know that homes that need some work are usually the best properties that produce the greatest return. Because of this, bank owned foreclosures are generally a very attractive investment model for these investors. The banks are willing to do just about anything to get rid of their real estate inventory, which means that businesses or individuals can get the bank to make them a really sweet deal so that they can buy the home, do the necessary repairs, and then sell the home if they choose, and still be able to make some money for themselves. For those that know how to do it right, there is a lot of money to be made in REO investing.

REOs aren’t hard to find because banks want to get rid of them as quickly as possible, and advertise them to the best of their ability. Real estate investors simply need to inspect the property to be sure it is something that they can repair and still profit from if they want to. Many homes become REOs because they do not have the best location, so the investor that is looking into an REO must be sure that the home is in a location, with an active buyer pool, if they hope to get their money out of it.


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About Deanna

Deanna is an experienced "LOCAL" REO Listing Agent providing foreclosure services in primarily the resort areas of Mammoth Lakes, Crowley Lake, June Lake, Bishop, and Big Pine, CA. Successfully closing over $40 million in REO Real Estate transactions and sales since 2005, Deanna provides professional and prompt REO Real Estate services. Click here to view my Featured Properties.

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