Understanding REO (Real Estate Owned) in Real Estate Investing
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Understanding REO (Real Estate Owned) in Real Estate Investing

A few REO lenders do recognize the fact that they will get less from a cash offer, so agree to handle the financing themselves for a higher sales price. Sometimes they'll even throw in a cash credit toward having the property fixed up. Find out who the biggest real estate lenders are in your community. Become a depositor, even a borrower. Find out who handles their REOs.
                     Real Estate Owned

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Do I know the problems with REOs?

Often these are cash deals. Most lenders prefer all cash for them. That way they get rid of the property once and for all. That means that you may have to secure the financing through other lenders. (A few REO lenders do recognize the fact that they will get less from a cash offer, so agree to handle the financing themselves for a higher sales price. Sometimes they'll even throw in a cash credit toward having the property fixed up.) In addition, there could be the following problems when buying REO:

  • Sold "As Is": The lender/seller often makes no warranty to you of any kind. This means that if you discover a problem after the sale, it's your headache, not the lender's. (That's why the price is cheaper.)
  • Few Disclosures: While most states now require sellers to provide disclosure statements, this may not apply to a lender who is federally chartered. The lender may refuse to give you any kind of disclosure statement. Or, if you do get disclosures, they may disclose virtually nothing, the lender claiming it knows nothing about the property. Once again, you're on your own.
  • No Repairs: Some lenders will fix up the property, but then charge full price. On the other hand, to get a lower price you may need to buy the property in the same condition as left by the previous owner. You'll want the most thorough inspector you can find. However, don't expect the lender to do anything toward correcting problems the inspector finds. Typically, beyond basic refurbishing, most lenders will make no repairs of any kind, even if the inspector finds problems that are a safety issue. (In that case, the lender may insist you sign a statement that you accept the property at your own risk.)

How do I get lenders to offer me "raw" REOs?

Find out who the biggest real estate lenders are in your community. Become a depositor, even a borrower. Find out who handles their REOs. (The REO officer is rarely listed as such by the lender.) Make friends. A business lunch would not be out of order. Explain that you're an investor looking to make an honest profit. If you can help out the lender by taking an REO off its hands in a quick, cash deal, you'd be happy to do it. It's a case where contacts can pay off.

Do I have to pay cash for REO?

Not necessarily. If it's a good property, the lender may be willing to offer financing (typically with your putting at least 10 percent down). In some cases, the lender may even offer a cleaning/fix-up allowance. In most cases, however, the lender just wants the property off its hands. That means that you'll need to secure financing elsewhere. Keep in mind that there is no end of lenders who will be happy to work with you on financing another lender's REO. If you set up outside financing in advance (something not hard to do), you can come to the lender who has the REO and offer it a cash deal. That has proven irresistible to many lenders in the past, and should continue to do so.

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