Whether you’re a new home buyer looking for a bargain, or a savvy real estate investor looking for properties that can be flipped for profit, chances are you’ve looked into the possibility of purchasing a Real Estate Owned home, or “REO.” Thanks to factors such as a tighter lending environment, reduced competition for mortgages, and current refinancing conditions, the popularity of REO property purchases has recently been on the rise. REOs have a number of advantages, over more traditional property purchases, such as below market value costs and sellers that are motivated to close. However, like all major investments, buying an REO shouldn’t be undertaken without first educating yourself on the specifics of the process.
When you begin looking into purchasing an REO, there are a few things that you need to make certain you have in order first. You’ll need a lender’s pre-approval letter on their own letterhead, your FICO scores, a verification of funds for the down payment, and a deposit check for 1% of the purchase price. Once you have all the necessary legal documentation in order, there are a number of websites that allow you to search REO properties in specific areas or by price; you can go directly to a lender or lending institution who will have an individual or even an entire department dedicated to REOs with an inventory of all of their properties; or there are local and regional Multiple Listing Service (MLS) databases that contain area REO listings.
The location of your new home should be a primary concern. Obviously the typical considerations of proximity to work, family, friends and schools is still paramount, but you also want to make sure that the house is located in a community and neighborhood that you want to be a part of. One strategy for finding a location with good values is to look for homes for sale in Lubbock, Texas, Akron, OH, Pittsburgh, PA, or any other cities that have experienced a minor downturn in the market at some point in the recent past, but which are currently showing signs of economic recovery.
One issue that’s a little complicated, but that you need to understand before attempting to purchase a REO home, is that in some more populated regions there are multiple local MLSs, and they don’t always communicate with each other. For example, if a listing agent based in the aforementioned Lubbock gets an REO listing in Amarillo, they may or may not choose to pay the fees to post it to both the Amarillo and Lubbock MLSs, so make sure that you search all the databases for your surrounding regions.
It is also important to remember that, when you’re purchasing an REO from the bank, that your property is always going to be as-is. The bank doesn’t do anything to fix up the home between the time that it is vacated, you see it, and the home’s closing. All responsibilities for repairs, even those that have to be done prior to closing (such as those needed in order to secure an FHA loan) will fall on the shoulders of the prospective buyer.
The time is right for informed buyers to look into their REO options, due to their current availability, the motivated nature of the sellers, and, of course, the economic advantage that REOs have over current market prices. Make sure that you are going into the process with open eyes, but, for the smart investor, REO properties can save the buyer tens – or even hundreds – of thousands of dollars on the final sale.