When people think about real estate foreclosure investing, they most often think about the foreclosure auctions. They imagine a group of investors bidding on properties in a meat market-like atmosphere. In actuality, there are several places in the foreclosure process that investors can home in on for property leads, and a couple of them don’t involve the auction block atmosphere.

The first stage of foreclosure investing involves pre-foreclosures. When a property owner falls behind in their payments, a notice of default is issued. This notice is filed (in most cases) at the county courthouse, where it becomes a public record, and that means anyone can access this information.

Once the notice is filed, the property owner has a specified time frame known as the “redemption period,” in which he must cure the debt or else the property becomes foreclosed on and goes to auction. In general, pre-foreclosures involve dealing with the homeowner face-to-face, which means a lot of time is spent going back and forth. One thing most amateur investors find when dealing with property owners in pre-foreclosure is that a lot of them are in denial and despite the arising foreclosure problem, they refuse to cooperate! For that reason, pre-foreclosures can be extremely time consuming.

Auctions are the second stage of the foreclosure process. At these auctions, investors will either have to be physically present at the county courthouse steps or hire someone to be their representative (power of attorney) to bid on these foreclosed homes. Again, time and money are issues here because financial resources can get eaten up rather quickly with all the traveling or hiring of representatives.

What’s more is that once you become the winning bidder for an auction, you’ll typically have 24 to 48 hours to overnight or wire funds to the attorney. That’s not a lot of time to put a deal and funding together, and sometimes doing this can be difficult. Oftentimes you have to do this without ever having seen the inside of the house since the former owners are probably still living there.

These are both good options, but I specialize in REO foreclosures, which is the third stage of the foreclosure process. With REO properties, I don’t have to travel all over the country to close killer deals. In fact, I can pretty much do most of my research online and with a solid power team; a smooth process to profit can be created!

REO foreclosures are properties that were not sold at auction. When no one bids on a property, it goes back to the bank and is then seen as a liability by the bank because it’s not making them any money. These homes can most easily be found on the MLS (multiple listing service) of the area you’re investing in. This makes the investing process much easier because all I deal with is a Realtor® who submits the offers and helps with the negotiation process until a deal is solidified.

With all that being said, you’ll still need to do your due diligence on each property and form a solid power team who will help you with your investing.

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An REO is real estate owned by the bank, and many investors consider an REO property to be money just waiting to happen. An REO is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and has had no luck getting bids. Because the property was not bid on, the bank then became the owner of the property. Naturally, the bank does not want to keep the REO any longer than possible, and this makes it a great opportunity for an investor. Not every REO is a good deal, but when you look at an REO you’ll commonly find that there is a lot of money to be made.
So, is this a foreclosure?
Technically speaking, the home was foreclosed on because the owner of the home failed to make their scheduled payments. The bank set up and went through a public auction, but there was not any bids placed on the home, so the bank ended up owing the property. Yes, the home was foreclosed on, but it is well past the foreclosure process and the bank will be anxious to get rid of the property.
Advantages of REO vs. Foreclosed Property
When you are thinking of buying an REO you have to 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.
Best types of REO to purchase
You might not think the type of loan the home was purchased with the first time around matters but it does. You should attempt to purchase REO’s that had a conventional loan the first time around, as you will likely get much better deals with these than you will if you look at FHA and VA loans. The federal government backs FHA and VA loans, and the government can actually buy them back if they are so inclined. Homes that had conventional loans the first time are often purchased for just a fraction of their value, meaning that they can make an investor a lot more money.
Which REO’s you should not purchase
Just because the bank owns a property does not make it a good deal. In fact, when you see that a home or property is an REO you have to wonder exactly what IS wrong with it. The house was not bid on because no one saw the worth in it. Did the home just not have enough equity? Were their IRS liens against it? Was the property just too badly damaged? You need to ask these questions. If the bank cannot answer the questions then you need to be even more skeptical. Take advantage of your right to inspect the REO so that you can see with your own eyes what may or may not be wrong, hire professionals if necessary as well.
One must also be sure that if they are purchasing an REO to fix it up and sell it, that the property is located in a desirable part of town. If the home is not located in a desirable part of town, you should really think about how wise of an investment the property may be. Perhaps location is why the property was not bid on at auction. There are three big things to consider when dealing with any type of real estate and those are location, location, location. Never let a seemingly good deal let you lose sight of how important location is for any piece of real estate that you intend to sell.
Why the bank will sell an REO 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 hand over fist and the federal government often penalizes them for each and every REO that they acquire.
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. Sure, they end up losing money on the deal, but they 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.