What is Foreclosure?

Foreclosure is the legal process which permits the lender to take ownership and sell a property to recover the amount owed on a defaulted loan.

Why does Foreclosure Happen?

For a number of reasons, a borrower may find they are unable to keep up with the costs of maintaining a property and making the mortgage payments:

- Loss of employment
- Reduction of income
- Retirement
- Illness, injury or death in the family
- Divorce or separation
- Catastrophic damage to property
- Changes in the market

What is an REO?

REO means “Real Estaste Owned” by the lender after it was foreclosed on. A property becomes REO when the lender has repossessed it and has not found a buyer.

How is the sales price determined on an REO property?

Most often, the lender’s asset manager establishes the sales price based on an appraisal, conditions of property, and broker opinion.

Where can I find Foreclosure and REO properties?

All listings on this site are foreclosure/REO properties. Check back often for new listings or subscribe to our RSS feed.

7 Reasons Why I Love Bank Foreclosures (REOs) 

There are tremendous opportunities that the bank foreclosure (REO) market gives us. More millionaires will be minted during the next five years than anytime in history. In the U.S., over two and a half million homes are in some sort of foreclosure process by some estimates. Some economists forecast another eight million foreclosures in the next four years. In my opinion, most of those will end up going to the
bank. And then we get to buy them.

Those who own rental properties, who buy and sell for a living or for fun, and who just like playing with real estate and making money in the process, have the capital required to pull off an REO purchase and repair. They have the knowledge to see how the investment can pay off.

1.  It’s a Thrilling Treasure Hunt

In the early stages of a down cycle and banks are not getting as much property back, the inventory list is small. Homeowners can always sell or refi when they get into trouble. But as you get further into a real estate recession, the inventory lost grows and the properties stay on the lists longer as they become harder to sell. That is when the real fun starts. 

What is treasure for us-investors and homebuyers-is a pain in the neck for the banker until he disposes of it. As you can see, banks operate with a much different set of rules than a private seller. If you know them, you will profit.

2.  All the Dirty Work is Done for You

Buying property that has gone through a foreclosure sale means all junior liens have been wiped out. No Judgments, no 2nd mortgages, no mechanic liens and no other funny stuff will appear on title. The property taxes have been paid and the property is vacant.

Buying a bank REO is a cleaner transaction than buying directly from a seller who may have a clouded title. Title claims from disaffected spouses, divorces, distant heirs or any other title flaws are generally nullified. You know what you are getting and you also get to inspect property closely to estimate repairs. Property taxes have to be brought current by the lender, as well

3.  Can Negotiate With the Bank on Fix Up

Regarding the property’s general condition, different banks have different ideas on what they will do to a property. What one bank calls a property in marketable condition, another bank will call junk.

Banks are not set up to deal with the renovation of a property. They may end up over improving a property but usually get the property painted and that’s about it. So REO properties are often dogs. I love ugly houses.

 

4.  Intact Equity

This is the best part. When you buy a property below the market value, you have intact equity. Depending on the property you buy, banks can discount on price anywhere from 5% to 35% or more. Intact equity means your properties will cash flow better, it is a buffer against market fluctuations and it greatly compounds the returns on your principal.

5.  Can Get Great Financing and Close Quickly

Not all banks will do this, but they will often give you a great loan on the property they just foreclosed on. Lenders’ REO departments have a special relationship with their lending

division where they will offer expedited financing.

Fannie Mae announced their new HomePath program where they offer expedited financing on their own REOs

6.  Great to Know the Realtor/Brokers who are Unemotional and Business-like. 

You can deal with these players for future deals. If you work the REO market, getting to know these people who are getting all these distressed deals is time very well spent.

To these guys, the house is just an asset that needs to be disposed of. It’s all numbers to them. The manager of an REO department,  who is dealing with hedge fund investors, operates in a different universe than an emotional seller. 

7.  You  Can Find Them in Great Neighborhoods

There is great benefit in finding properties in prime neighborhoods. When a real estate market begins to pull back during recessionary times, the first properties that show up on lender’s REO lists are:

-Condos
-Remote properties far from the job base
-Houses in primarily renter occupied areas
-Properties with material defects (the odd houses, non-conforming for the neighborhood, on busy streets, next to railroad tracks, adjacent to commercial areas)
-Outdated houses
-Odd configurations
-Old turn of the century houses
-Nicer houses in good neighborhood

Higher quality properties come last because they are more desirable, and the wealthier homeowners generally have more staying power to weather downturns. Depending of the attractiveness and desirability of these properties, they can fly off these REO lists faster and for more money. ut show up they do, and in great numbers.  But high end properties can sell for far greater discounts because there is higher variability at that price level, a smaller buyer population and the bank has more money tied up in it.

If you are going to be a buy and hold investor, having houses in quality neighborhoods dramatically makes property management easier and the real estate there in those areasappreciates more.

Conclusion

Knowing where all these foreclosures are coming from, who’s got them is great background to know how to proceed in this booming REO market.

We are now in the part of the price cycle where the lenders have the foreclosure deals. Post-foreclosures will be where the action will be for years, and as we go deeper into this soft market, be prepared for the REO managers to deal. The astute real estate investor takes advantage of economic trends, and strike when bargains abound.

DOMA SOLUTIONS
If you are looking for ORE/REO solutions, or are a receiver looking to help sell your assets, we offer solutions for this.  Please visit www.domasolutions.com