How do you locate foreclosed homes or properties to buy? What does REO stand for? Are all foreclosed properties falling apart and in need of a lot of repair? As a new real estate investor, should I buy a foreclosured property?
These are all common questions for new real estate investors, let's see if we can answer them. To start, REO stands for "Real Estate Owned" and means bank-owned property.
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As mentioned in a previous article about finding foreclosures, buying foreclosures as investment properties can be a lucrative way to get started in the investment property side of the real estate business.
More often than not, foreclosure properties are sold at a price lower than its market value - which means they need a lot of repairs done. This allows investors to make considerable profits by either renting out the properties after renovating them and then selling at a higher price than what was initially paid. But just how much renovating and repairs are required and how much will it cost?
There are many stages in the foreclosure process (e.g. pre-foreclosures, trustee sales, auctions, etc.), but probably the best one to take advantage of is the pre-foreclosure stage. This is the time before the property is listed, so if you act soon enough you will be the only person to negotiate with a willing seller. And if you can make this a habit, then you’ll have a continued advantage over everyone else.
Locating foreclosures is not exactly difficult—you can easily find them on the Internet. There are a number of banks and sites that list foreclosed properties who are looking for buyers:
How to Locate Foreclosed Homes for Sale
Websites like Zillow, Trulia, RealtyTrac and the real estate site for real estate agents, the MLS, will have sections for local foreclosed properties. Howerver, these sites usually don't give you a lot of information or pictures of the inside of the property.
TIP: It’s important to know the steps involved with foreclosures because this will give you valuable insight in how to locate them.
Real estate agents are another great way to find foreclosures. Once you decide on the location and perhaps the type of property, contact an agent who is familiar with the area. It is not uncommon for agents to have clients willing to sell.
You can also check newspaper ads and local county offices for announcements and advertisements. Also try to subscribe to foreclosure listings put out by reliable real estate brokers. Here, you can find many foreclosure listings.
It also pays to have a real estate broker to assist you. They might be able to help you negotiate prices with the seller, in addition to other terms such as closing costs and dates. Besides, you’ll need one to complete the paperwork requirements at auction anyway, so you might as well have one at your side from the outset.
Foreclosure properties are sold at auctions to either the highest bidder or to the person who can offer the most agreeable terms. Before joining bidding, though, there are a few important details you should take into consideration:
- Amount owed on the property – This amount usually comprises the initial bid, in addition to closing costs.
- Property’s market value – Compare this figure to the opening bid and then get the difference. This amount will reflect the bargain you might be getting.
- Renovation costs – If you plan to renovate or conduct repairs, you should have these expenses estimated in order to calculate your overall profit.
- Property research – Obtain various reports (e.g. transaction history, comparable valuation) to determine if the property has secondary liens, such as tax liens.
Real Estate Owned
Hundreds of thousands of homes are foreclosed on each year, many of which are never sold at auction. These homes become property of the banks and are known as REOs, or “real estate owned.” Finding them is easy: they’ll be listed on banks’ REO lists. There are several benefits to buying REOs, all of which are listed in this article: An Eye for Investing Opportunities.
With bank REOs, you should become familiar with contacts of REO departments at banks wherever you intend to invest. Once you become familiar with these people, let them know what kind of property you’re interested in and in what area. Checking with them regularly will eventually land you information about properties before they are made known to the public.
However, many smaller banks will not have enough foreclosures to justify an REO department. In this case, simply call the bank and ask to speak to whoever is responsible for these matters. Again, your extra effort might pay off, so give it a shot. Besides, how much time does this really take?
By buying a property in the pre-foreclosure window of time, you can save money by contacting the owner before there's an agent representing the sale or the home goes through into the auction phase where there's more competition. Today, just after the real estate crash, there are a huge number of homes on the verge of foreclosure or foreclosing.
TIPS: For state by state guides for foreclosures try: RealtyTrac. Judicial foreclosures are states that use judicial foreclosure and require court notification and then non-judicial foreclosures are where states use deeds of trust and contain the power of sale clause and don't require court action.
In the pre-foreclosure state - you have a few advantages and disadvantages:
- Can walk property and check upkeep
- Less competition
- Settle contract problems and or liens
- Owner has 2-3 months to pull the property out of the foreclosure process by paying off what is past due
- County records will show what is owed on the property and what liens are in place
- Property will most likely need a number of repairs as the owners has lacked the funds to keep up the property
When purchasing a property that's headed towards foreclosure, make sure you talk to the decision maker at the mortgage company or bank. If the property has problems, list them and go through those problems and show how, if you purchase the property, those problems won't be the responsibility of the bank or lender - you're selling the reasons why they should sell the property to you.