Investing in real estate-owned properties—or REO—can be highly lucrative, but it’s also risky. To get started investing in REO property, it’s important to follow some best practices when making offers and purchasing decisions. Here, we’ll discuss some tips to apply when starting out.
What Is REO Property?
Real estate-owned property is a property that is owned by a bank and listed for sale. After foreclosing a home or other piece of real estate, the lender first tries to auction it off to the highest bidder. If it doesn’t sell at the auction, the bank retains ownership and lists it for sale as REO property.
Tips for Investing in REO Property
When investing in REO property, keep the following pointers in mind. They’ll help you avoid common pitfalls and increase the odds of seeing a return on your investment.
Make a Fair Offer
First, when making an offer on a listed property, make sure it’s fair. Don’t go too low on your offer—doing so is more likely to get a rejection from the bank since REO property is usually listed pretty close to its market value.
At the same time, you don’t want to go too high since that could diminish your return on investment. If you’re not sure, you might want to consult with a real estate agent or attorney.
Schedule an Inspection
REO properties are sold as-is, meaning the bank isn’t likely to agree to pay for repairs as part of your offer. However, if you have the property inspected, you might get some more leeway in your negotiations. If the inspection finds that there are major repairs needed, it may be easier to negotiate for a lower price or to have the bank pay for the more urgent repairs.
Having the property inspected also helps you determine whether the property is worth buying in the first place. If it seems like there would be too much of a turnaround between purchase and resale, or if the needed repairs would simply be too expensive, then it might not be worth going through with the deal.
Get an Appraisal
Getting a professional appraisal of the property is also key when determining whether it’s worth the asking price. While REO properties are typically priced at or slightly above market value, it’s best to verify that with an appraisal.
Avoid Common REO Property Pitfalls
Some additional tips to apply to avoid common REO property pitfalls include:
- Get preapproved for financing, not just pre-qualified.
- Offer shorter inspection periods.
- Offer to split fees.
- Include inspection and appraisal contingencies in your discussions.
- Don’t take on more work than your budget can handle.
Finally, it helps to have a real estate attorney on your side to help with the legal aspects of REO property investing. Purchase contracts and other agreements all require some legal acumen to safeguard your best interests, and an attorney can add extra weight to your position in the course of negotiations.
If you’re looking to invest in real estate, including REO property, contact Hart David Carson LLP to help you get started.