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The REO Market-How to Approach It

Mar 12, 2008
REO is short for "Real Estate Owned." These are properties that have been foreclosed upon by a bank or other lender.

"Asset managers" are the personnel you'll deal with in REO departments. Their job is to inspect the properties, see that needed repairs are done, and manage the properties until they're sold.

You may be able to find great opportunities in this area if you're willing to learn the ropes and deal with the often tough-minded REO departments of banks and other lenders. This article provides you the guidelines for doing just that.

Guideline 1: Understand the Lenders' Attitudes Toward REO Properties Banks and lenders detest having REO properties on their books. Instead of assets, they have liabilities. Obviously, they want to get rid of these properties; however, they're not willing to do it at a loss if they can possible prevent that from happening.

So, as an investor, you not only have to handle this attitude, but you also have to deal with the fact that banks and lenders often don't like to publicize the fact that they have REOs on their books. They have three reasons for this.

First, they don't want federal regulators on their backs, questioning their business practices or solvency.

Second, they don't want their depositors knowing about REOs. Depositors want security above all and if-rightly or wrongly-they see REOs as evidence of questionable practices, they may pull their money out. Banks want to protect their image.

The third reason is that when lenders have a large inventory of REOs, they don't want the market at large to know about it. If the information leaks out, prices could drop dramatically.

So, how do you find out about REOs? That's our next topic.

Guideline 2: Present a Professional Image to the REO Department REO asset managers don't want to deal with amateur investors, so you need to approach them as a knowledgeable professional.

First, call the lender and ask for the REO department. Once in contact, explain that you're an independent, professional investor and are interested in buying REO properties and would like an appointment with a decision-maker.

Then, use that appointment to present your case and convince the decision-maker that you have the assets and experience of a committed professional. If you do your sales job right, then you can ask for a list of REO properties.

Note: Sometimes, REO departments handle the properties themselves; sometimes, they use a broker. So, you should be prepared to deal with both.

Guideline #3: Inspect the REO Properties It's a fact of life that many foreclosed properties aren't in great condition. The former owners aren't happy people so they may not take care of the property or even damage it to vent their anger. Therefore, you'll definitely need to do due diligence and inspect any properties under consideration.

In some cases, lenders will do cosmetic repairs to a property since they know a more attractive home will bring a higher price. To counter this possibility, I recommend that you try to show up as soon as the property is acquired and offer to take it "as-is" to get a lower price.

Buying REO Properties-the Mechanics There's no great secret to buying these properties. You buy them just as you would any property. First, you make an offer. Then, the lender either accepts it, rejects it, or makes a counter-offer. In the case of a counter-offer, you negotiate.

In terms of payment, most lenders prefer cash because they want to be rid of these properties cleanly and quickly. If this is the case, you'll need to go to a different lender to get your financing. Just don't expect a great deal; that lender may want 10% or more down plus closing costs. However, some REO departments realize that they'll get less from a cash offer so they may offer you financing. The advantage of this is that you may be able to pay a lower down payment, get easier terms, and also obtain some money for improvements. The disadvantage is that you'll pay more in interest and fees than you would on a strictly-cash basis.

Typical Problems As I stated above, many of these properties are in terrible condition and may not be worth the money, so inspect them carefully before you commit to a purchase.

Also, as I said earlier, REO properties are sold "as-is." This means there is no warranty of any kind. Therefore, if you buy a property that later requires very expensive repairs, you're stuck with that expense. The lesson-perform due diligence very carefully!

In the case of federally-chartered lenders, you may not get a disclosure statement (most states require these now). This means there's the possibility you could end up stuck with a property that has severe and expensive problems (e.g., lead paint, etc.).

Finally, if as a result of a home inspection, you find repairs that need to be done, don't expect the lender to pay for them. As far as they're concerned, it's your problem to solve.

Key Point: When approaching an REO department, be a fully-prepared professional.
About the Author
Jack Sternberg is the creator of the renowned "Buyers First Program". As the "gurus' guru", he is well known by the professional creative real estate community as "Obi-Won Kenobi". Having been a full time investor since 1977, Mr. Sternberg has been "at" the closing table more than 1,500 times. Mr. Sternberg has the depth of experience that lend value to his associations. Contact Mr. Sternberg at www.askjacksternberg.com
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