Is REO the Silver Lining in the Current Downturn?

We all want to turn lemons into lemonade, but what’s the winning recipe in this decidedly downtrodden economic environment? Increasingly, savvy investors are finding ways capitalize on these historic conditions with REO property. First, let’s define REO. Simply put, a Real Estate Owned investment is property that has returned to the mortgage company or bank. This typically occurs after the bank has unsuccessfully attempted to sell the property at auction to recover the value of the loan.

It’s very common that these distressed properties are not bought, or even bid on, at auction because they are actually worth less than the value of the loan. In fact, being “under water” by owing more than the value of the home is why the original owner couldn’t simply sell the property and avoid foreclosure.

After the original homeowner misses mortgage payments and the home is not sold at auction, it is repossessed by the bank. This is when the property is classified as REO. At this point, the bank will negotiate with vendors and the IRS to remove liens and pay other items like homeowner’s association fees. If the original owner is still living in the home, the bank also handles eviction. Basically, they try to package the property and make it ready to sell.

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Many of the REO homes are in less than pristine condition, with basic maintenance ignored and in need of many repairs before it’s ready for the retail market. The bank, not being in the business of fixing homes, will want to sell these assets in “as is” condition. This means you could pay a relatively low amount for a property that can be fixed and sold for a profit.

REO property offers the prospect of profits, but you must be diligent. REO offers both opportunities and challenges with additional issues including property preservation, title issues, code compliance, liability, the need for repairs before qualifying for financing, and turning a “fixer upper” into a home for the retail market.

Other issues are that banks can be stubborn and decide to hold on to REO properties for years instead of lose money on a deal. Or you might get a REO house for a real bargain, but see profits evaporate when repairs and renovation costs spiral.

One other way to make money from REO property is to bypass the banks and seek private investors who buy bank-owned REO assets in larger portfolios. Since these private investors negotiate with banks and buy REO investments in bulk at less than market value, you can shop around for the deal that makes the most sense for you.

Returns on REO properties from private investors differ, of course. But you could see around 15 percent ROI (Return on Investment) at the end of the project. There seems to be consensus among industry experts that “the long game” of buying, fixing, and holding property for eight or more years can provide an enormous return—allowing you to triple your investment.

Do your research, pick a strategy that works for you, and turn the lemons of today’s market into lemonade for your future.

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