REO Properties for First Time Real Estate Investors
What Are REO Properties? Real estate owned properties (REO) are properties that the bank or mortgage holder takes ownership of— often due to foreclosure or a reverse mortgage balance — underscoring why the moniker, ‘homeowner’, applied so jubilantly the moment closing happens and the bubbly is poured, is rarely ever so. Depending on when you pull the stats, 1 in 3,000 to 1 in 4,000 homes in the U.S. are in foreclosure at any given time. According to ATTOM Data, approximately 151,000 foreclosure filings were filed in 2021, down from 2.8 million peak during the Great Recession. Foreclosures processes differ across states, but generally the mortgage holder begins the process to foreclose on a home three to six months after the ‘homeowner’ (again, not actually) misses their mortgage payment. The Pluses and Minuses of Investing in Foreclosed Properties REO properties are often sold at a discount to a move-in ready home in the same neighborhood, largely because the home is sold both in as-is and unknown condition. A home being sold in as-is condition offers little to no room for negotiation since the discounted price reflects the disrepair. The unknown aspect of these properties means that what you get is not only what you see, but also what you don’t see. Has the basement recently flooded? Who knows— the seller, who is the lender, doesn’t know the home’s condition, and the homeowner is not required to disclose it. Additionally, the seller offers no warranties on the sale, meaning there is no recourse for undisclosed defects. Where to Find Foreclosed Properties The REO route to property investment has a sense of derring-do and inside scoop, what with its off-book listings and short sale structures. These properties, however, are often hidden in plain sight.Government agencies are a plentiful if overlooked market for REO finds. Agencies ranging from Fannie Mae and Freddie Mac to Veterans Affairs and the Department of Agriculture find themselves the unintended owner of foreclosed properties as a mortgage guarantor. Private sector entities such as auction companies and mortgage lenders are another channel for properties. Purchase Checklist: Before buying an REO property, ensure that you do a thorough inspection. Using a professional inspector is the gold standard but if you give the property the once-over yourself or with a contractor, pay particular attention to structural or foundation issues, the electrical wiring and panel box (copper is great, aluminum or knob and tube, not so much), the heating system age and type (a furnace that’s less than 10 years old and gas is great), the attic/roof condition, evidence of mold or water damage, and the plumbing. Appliances, drywall, flooring, cabinets and fixtures are cosmetic, easily fixed and much cheaper to remedy. See also: The Skinny on Fix & Flip Investments