REO 101

Like many investors, I used to attend the Commisioner’s Sale and buy homes at the foreclosure auction.  That was a great buying strategy until about 2 years ago when I began to see a definate shift in the types of homes being sold at the auction.  Fewer and fewer homes had sufficient equity to get an investor to make an offer, so the lenders were being forced to take the homes back. 

What I am now seeing, is a glut of bank owned (REO’s) properties listed for sale.  I am now buying from the banks and only going to the auction if I see something that really looks promising.  There are some secrets to buying an REO (this stands for Real Estate Owned- by a lender is implied).  The first item is to locate these properties.  Some are easy to find on HUD websites, but most are just listed on the local MLS system.  There are REALTOR “code” words that indicate a property is bank owned.  Some of these include “as is”, “proof of funds”, or “special deed”.  Since most lender owners will not do repairs, most REO’s are not going to qualify for FNMA or FHA type loans.  While there may be lots of deals out in the market right now, being able to capitalize on them requires some preparation.  Stay tuned for more!

Foreclosures

Foreclosures 

Foreclosure is the legal process where a lender regains ownership for a piece of real property that has been pledged as collateral for a mortgage.  This is a multi step process where the lender files public notice of the default in the loan (lis pendens) and initiates the court proceedings necessary to regain title to the property.  Usually the final step is a court ordered auction by the sheriff or county commissioner.  Historically these sales were held in front of the county courthouse, hence the sayings “bought on the courthouse steps” or “courthouse sale”.

Foreclosures must have a significant amount of public notice in order to be sold.  This is to give plenty of notice for any parties who may have a claim on a property opportunity to contest the sale.  Foreclosure sales are usually advertised in the newspaper and by public postings in the courthouse.  Also, most counties have a web site which will show a list of auction dates and the address of properties that will auctioned.

Prior to the foreclosure auction, an appraisal is often done and posted publically.  In redemption states the auction sale price must meet a percentage of the appraised price to prevent the owners from coming back and redeeming (buying back) the property.

In

Kentucky, there is a one year right of redemption unless the property sells for more than 2/3rds of the appraised value.  If the property sells for less than this, the owner who was foreclosed upon can pay the purchase price paid by the new owner and regain the property within one year.  This means that the new owner will not get reimbursed for any repairs or upgrades made to the property before the redemption period ends.  Most investors either pay 67% of appraised value at the auction, or make no repairs or improvements until the redemption period has passed.

If you are interested in foreclosure sales, make a trip to your courthouse and find a helpful clerk to show you where the notices are posted and when and how the actual sale is done in that county.  Attend a few sales and watch to see how it works.  In my county, most of the properties are bought back by the banks because the loan values are so high. 

Let’s find a deal!

Getting started- Finding Properties 

 So you think you’d like to buy some investment property and make big bucks.  The opportunity to make money is certainly here with investment property, but it’s just not as easy as the infomercials say.  Let’s look at some realities.

Before you even start looking to buy properties do a financial analysis on yourself.  Do you have the financial means to get conventional financing, or do you need to find a “hard money lender”?  If you have a good credit history and income, there are several local banks that will lend money to investors at pretty good rates.  If you have some credit “issues”, then you need to find some investors who can evaluate the property and lend you money to get started.  These are “hard money” lenders and rates are much higher.  Make sure to include financing and any other holding costs in your property analysis.

Okay now to the good stuff.  First, finding the ideal property is not easy.  Even after 10 years of investing, the hardest part is still finding a property that makes financial sense to buy.  I may evaluate 15-20 properties for every one I buy.  I will say this though, because of all the foreclosures, right now it is easier to find a deal than anytime in the past 10 years.

Where do I look?  I look for homes in the area I want to buy in that are rough looking or possibly abandoned.  Then through the wonders of the internet I look to see who owns it, and if I can find the assessed value and amount of any liens against it.  If it appears the property is not severely over leveraged, and I can locate the owner, then I’ll evaluate it for profitability.  If the numbers look good, then I may try to buy it.  Often, the sad looking, neglected homes are owned by people in some financial distress and they need a way out. 

You can also use a REALTOR to help locate good deals.  It’s important to use a REALTOR that understands investment property and isn’t afraid to write and submit a “lowball” offer.  If your REALTOR says “that’s too low, you’ll insult the seller”, find another REALTOR.  The one you have doesn’t understand your financial goals.  Tip for you, don’t ever fall in love with the investment homes you look at, they are a business deal and need to meet the criteria to be profitable.  Find a REALTOR who is familiar with REO’s (bank owned properties that have been foreclosed on)and can help you through the process.  REO’s are usually sold “as is” with a special warranty deed, and rarely get conventional financing because of condition.

You can use the internet and search for HUD homes, but again a REALTOR who knows how to write HUD offers is helpful because the process is very tedious, and the rules are quite strict for investors.  However, this is a great source for homes that need a lot of work as owner occupied loans rarely allow the property to close unless repairs are done. 

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