Buying Bank Owned (REO’s) and Short Sale Properties

REO’s and short sales have provided real estate investors the opportunity to purchase real estate at a fraction of the appraised value. But are they still a good source of potential deals for investors in this current market climate?

If so how do you buy them?

The Rise of the REO’s & Short Sales

Short sales and REO’s exploded onto the real estate market after the housing crash of 2008. For many it was the first time they ever encountered them or even heard of them. They were rapidly snapped up by both giant institutional investment firms, billion dollar hedge funds, as well as by individual investors like yourself. These properties were sold for 30 to 50 cents on the dollar from their previous values just a couple years earlier. You would be a fool to pass up on opportunities like that. House flippers, buy and hold landlords, real estate wholesalers, residential and commercial developers and regular home buyers all wanted a piece of the pie.

Some media outlets have done a stellar job of reporting the new real estate and economic rebound as of late. It is improving and overall these opportunities have shrunk, along with the spreads. But, the size of the ongoing opportunity is often seriously understated. At the beginning of 2018 a new round of foreclosures began to hit the market. According to data from US banks state there over $100 billion in non-performing mortgages and REO’s in America. This is on top of the 50% of loan modifications which are now re-defaulting and are going back into foreclosure. And Maryland fund manager Amed Hazel reminds us in his new book that “there will always be a default rate.” The discounts may not always be as dramatic as they were, but this gets offset with faster growing property values, and vice versa.

The Different Types of Distressed Property

REO’s and short sales are the product of the foreclosure process. Once a borrower defaults they fall into pre-foreclosure the property can often be purchased as a short sale. REO’s are those that have gone all the way through the process and have been repossessed by the bank.

There are other situations in which these properties are purchased too, including:

Foreclosure auctions
Tax Lien or Deed sales
Estate Sales
Reverse Mortgages
Forced sales due to divorce, bankruptcy, and more

Buying REO’s

Buying REO’s can be both more complicated, and easier than most think. These are properties owned by banks, mortgage lenders, asset managers, government agencies, private lenders and credit unions. The purchasing process is often the same as buying most other properties, at least in the basic mechanics of making an offer, signing a contract, and closing. However, the two big challenges are finding the banks that have REO’s and that can sell them, and the often tough conditions banks demand. Find the banks, find a good contact, and negotiate. Do this accurately, and in volume, and you shouldn’t have a problem. Real Estate agents realtors and brokers are also a great source for purchasing these properties.

Buying Short Sales

Much of the same as the above applies to purchasing short sales. These can be purchased directly from the borrower/owners with a real estate agent or attorney involved. The mechanics are a little different. The back and forth negotiating and waiting to get a short sale approved can be trying. However, you are trying to get the best price possible, and there has to be some trade off for that.