REO is short for "Real Estate Owned." These are properties
that have been foreclosed upon by a bank or other lender.
The REO department is staffed by "asset managers." Their
job is to inspect the properties, make the necessary
repairs and operate them until they're sold.
You may be able to find great opportunities in this area if
you're willing to learn the ropes and deal with the often
tough-minded REO departments of banks and other lenders.
This article will give you the guidelines for doing just
that. Understand the Attitude of Lenders Toward REO
Properties Naturally, lenders don't like to have REO
properties on their books. Instead of an asset, they have a
liability. Equally naturally, they want to get rid of these
properties, but they're not willing to do it at a loss, if
at all possible.
Not only do you, as an investor, have to deal with this
attitude, but you also have to deal with the fact that
banks often don't like to publicize the fact that they have
REOs on their books. They have three reasons for this.
First, they don't want federal regulators on their backs,
questioning their business practices or solvency.
Second, they don't want their depositors knowing about
REOs. Depositors want security above all and
if—rightly or wrongly—they see REOs as evidence
of questionable practices, they may pull their money out.
Banks want to protect their image.
Third, if lenders have a large inventory of REOs, they
don't want the market at large to know about it. If the
information leaks out, prices could drop dramatically.
So, how do you find out about REOs? That's our next topic.
Present Yourself As a Professional to the REO Department A
lender's REO asset managers don't want to deal with amateur
investors, so you need to approach them as a knowledgeable
professional.
First, call the lender and ask for the REO department. Once
in contact, explain that you're an independent,
professional investor and are interested in buying REO
properties and would like an appointment with a
decision-maker.
Then, use that appointment to present your case and
convince the decision-maker that you have the assets and
experience of a committed professional. If you do your
sales job right, then you can ask for a list of REO
properties.
Note: Sometimes, REO departments handle the properties
themselves; sometimes, they use a broker. So, be prepared
to deal with both. Inspecting REO Properties As you might
expect, many of these foreclosed properties aren't in great
condition. The former owners aren't happy campers so they
may not take care of the property or even damage it to vent
their anger. So, you'll definitely need to do due diligence
and inspect any properties that you're considering.
In some cases, lenders will do cosmetic repairs to a
property since they know a more attractive home will bring
a higher price. To counter this possibility, I recommend
that you try to show up as soon as the property is acquired
and offer to take it "as-is" to get a lower price. The
Mechanics of Buying REO Properties There's no secret to
buying these properties; you buy them just as you would any
property. First, you make an offer. The lender either
accepts it, rejects it, or makes a counter-offer. In the
case of a counter-offer, you negotiate.
In terms of payment, most lenders prefer cash because they
want to be rid of these properties cleanly and quickly. If
this is the case, you'll need to go to a different lender
to get your financing. Just don't expect a great deal; that
lender may want 10% or more down plus closing costs.
However, some REO departments realize that they'll get less
from a cash offer so they may offer you financing. The
advantage of this is that you may be able to pay a lower
down payment, get easier terms, and also obtain some money
for improvements. The disadvantage is that you'll pay more
in interest and fees than you would on a strictly-cash
basis. Typical Problems to Expect As I said earlier, many
of these properties are in bad condition and may not be
worth the money, so inspect them carefully before you
commit to a purchase.
Also, as I said before, these properties are sold "as-is."
This means there is no warranty of any kind. So, if you buy
a property that later requires very expensive repairs,
you're stuck with that expense. The lesson—perform
due diligence very carefully!
In the case of federally-chartered lenders, you may not get
a disclosure statement (most states require these now).
That means there's the possibility you could get stuck with
a property that has severe and expensive problems (e.g.,
lead paint, etc.).
Finally, if as a result of a home inspection, you find
repairs that need to be done, don't expect the lender to
pay for them. As far as they're concerned, it's your
problem to solve.
Key Point: When approaching an REO department, be a
fully-prepared professional.
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment and the creator of the renowned "Buyers
First Program" who's been in the business for more than 30
years. Sternberg's deals have totaled over $750 million and
he's been to the closing table more than 1,500 times. For
more, visit http://www.askjacksternberg.com
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