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REOs (Real Estate Owned) are bank owned properties that have been deeded to the property owner’s lender because of a mortgage or deed of trust default. These properties are most commonly deeded to the lender by a deed in lieu of foreclosure, or a court action and resultant foreclosure auction. Once the bank controls the deed they will then start to market the property to get as much of their loan balance as possible.
Investors are estimated to buy 94% of all REOs while the remaining 6% are sold to end-users who will actually live in these homes. Often the agency who guaranteed the homeowner’s loan will also finance a new buyer if he plans on living in the property. The high rate of investor to homeowners buying REOs is because most REOs need repairs ranging from minor to tear-down status.
Once an REO is listed for sale an investor must determine his exit strategy even before he buys it. This is because he will be keeping it or reselling it – either way he must make money or he won’t be in an investor very long. There are four exit strategies that an investor must choose from which include:
1. Wholesaling is the most common method of reselling REOs. Wholesaling is where the investor gets a property under contract and resells it to another investor who will use one of the following exit strategies. The buyers for these properties purchase them from the wholesale investor with cash or hard money, seldom is any financing available from the investor-seller.
2. Rehabbing and selling to a retail end-buyer is very common but requires money to purchase the property, carrying costs, repair costs, selling costs and some rehab knowledge if the investor does the work himself. This is where the largest profits are in investing in REOs. Again, these properties are purchased for cash from a wholesaler or from the Asset Manager of the lender – seldom is financing allowed.
3. Buying to rent and landlord the property is a long-term strategy that takes a definite mindset because of the various issues of dealing with tenants. Using a management company is one solution to the day-to-day problems of landlording. Whether purchased from a wholesaler or the Asset Manager, these are cash transactions also. However, a buyer can often get end-buyer financing through conventional lenders because of the cash flow of the units.
4. Most seldom used because it isn’t well understood by novice investors is referred to as wholetailing. In this situation an REO is selected because it needs less than two weeks of patch and paint to bring it to a very acceptable move-in condition. It is then sold to a retail buyer who is charmed by the neighborhood, local schools, or some feature of the property. The profits on these transactions can be as large as full rehabs but the investor must be selective in purchasing the property in terms of cost and amount of work needed. Never are kitchens or bathrooms replaced in these rehabs.
In summary, there are four very productive money making methods of investing in REOs. The key, if you are buying REOs to wholesale, is to know the After Repaired Value of the property and what your buyer will pay so you have an expected profit going into the deal. Generally, rehabbers pay the most, landlords pay based on cash flow only, and wholetailers look for special features and minimal rehab work but should pay a premium for these properties. Know your end-buyer before you buy an REO and make sure you have a strong buyers list to market the property as your best exit strategy.
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Source by Dave Dinkel