The foreclosure crisis has caused many REO properties to be on the market. This presents a great opportunity for real estate investors seeking to buy foreclosed homes cheap. Many of these are first-time investors who don’t understand this type of real estate investing, which leads to the question…
“What’s the difference between a regular foreclosure and an REO foreclosure?” This will be explained here.
Foreclosure Properties for Sale: What Does REO Mean?
REO is the acronym for real estate-owned. It’s a nice way for banks to say “we’ve foreclosed. Hence, when you see these types of listings, they have already been foreclosed on and have gone back to the bank.
A “regular” foreclosure, by contrast, is a process. It is a course of action to be gone through; in this case, the sales process. An REO property can be bought at auction (sold off on the county steps) by any qualified, interested party, ie, an investor or a new homeowner.
Advantage and Disadvantage of Buying a Real-Estate Owned Property
Advantage: REO properties can be bought cheap. The reason for this is simple – banks are a business and they lose money when they have these types of properties on the books. In fact, they lose money in two ways – from money going out; and money not coming in.
Money Going Out: There are carrying costs with REOs that banks have to pay until a property is resold. For example, homeowners insurance still has to get paid; HOA dues still have to get paid; and the property has to be maintained (grass, cut, windows repaired, boarded up, locks changed, etc.).
No Money Coming In: Nobody is paying the mortgage when a property is foreclosed on, so the bank is not making any money.
Disadvantage: Most often, banks don’t do (ongoing) repairs on REO listings. This means investors are buying them “as is”. Keep in mind that banks are a for-profit business and they’ve paid the carrying costs for the property since the previous owner stopped paying the mortgage. They’re looking to pay out the least amount of money possible – and get the property resold as soon as possible.
It is very common for potential investors to not receive disclosures as to the history or condition of the property. Hence, you could be buying a real cash-sucking money pit when you invest in REOs. There could be all kinds of problems – and they could be expensive (eg, electrical, roofing, contractor liens, etc.).
If you’re thinking, “I’ll just get an inspection done before buying, ” think again. You might not have the opportunity, depending on when the property is slated to be sold at auction and how the auction is carried out in your municipality.
In spite of the drawbacks, purchasing an REO property is a great way to buy foreclosures cheap.