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Texas Coast Girls Like REOs

Little girls have pretty curls but I like REOs.

What is an REO?

Banks normally foreclose on a homeowner, at a public foreclosure auction. If there are no buyers at the auction, the bank ends up owning the property. This result has a name: REO.

  • REO stands for "Real Estate Owned by the bank".
  • Banks often sell REOs to investors at reduced prices.
WHY BANKS GET STUCK WITH REOS

1. The property had little, or no, equity. No investor in their right mind would by a home at foreclosure for what it’s worth as there would be no room for profit.

2. The property is in poor condition and no one would take the risk of buying it at the auction.

3. There was an IRS lien attached to the property because the homeowner had owed back taxes. Most bidders at foreclosure auctions will not take the risk of buying a property that has an IRS lien due to delays in reselling the property.
 
WHY BANKS WANT TO GET RID OF REOS AS QUICKLY AS POSSIBLE

Banks REOs represent the evidence of bad loans that the bank has made. To the bank, they are a liability rather than an asset. Every month that the REO remains unsold, the bank loses. There are many reasons that a bank would sell an REO to you at a deep discount:

1.    The bank has received a large cash settlement from their Private Mortgage Insurance Company. Private Mortgage Insurance is also known as PMI is insurance that covers the bank for its losses when it forecloses. Depending upon what is bid at the auction, PMI will make the bank a full or partial settlement. This cash infusion offsets some of the loss the bank may have when it sells the REO at a discount.

2.    Banks are penalized for having too many REOs. A bank numerous REOs may not be able to borrow money from the Federal Reserve or may have to pay a higher interest rate on the money that the Federal Reserve loans it. As stated before an REO on the books is evidence the bank made a bad loan.  Banks need to borrow money from the Federal Reserve  and they will sell REO’s at a steep discount to protect that opportunity.

3.     Banks are not set up to deal with REOs. Many banks do not have the luxury or the need for an REO department. When a bank gets an REO, it assigns the task of disposing of the property to a high ranking manager, such as a department manager or a regional manager. This unfortunate person receives this unwelcome task in addition to his normal duties. He does not get paid more money to deal with REOs. The REO will be a pain in the neck for him until he finds a way to dispose of it. Needless to say, this person will want to get rid of the property as fast as possible. This makes it easy for an investor who knows what he is doing to make the bank a low offer and get it accepted.

4.    Banks frequently own mortgages to properties located in different states. Some of these out-of-state properties end up going to foreclosure and become REOs. When a property is foreclosed upon and a bank ends up with an REO that is located in another state, it makes it difficult for the bank to make decisions about the sale of the property. It is not practical have a bank representative fly to another state, go to a property, assess its condition, then hire contractors and real estate agents. Even if the bank were willing to do this, the bank representative would need to stay and oversee the work that is being done. This would be too costly and time consuming. Some of your best REO deals will be with local properties that are owned by banks located in other states.

5.    The bank will have carrying costs associated with the property. These include property taxes, water and sewer bills, insurance bills and electricity bills. If the property is a condominium, there will be condominium fees. If it is a townhouse, there will be homeowner’s association fees. In addition to carrying costs, there are seasonal maintenance costs. The property must be winterized in the colder months. In the milder months, the lawn has to be cut and the shrubs trimmed. As indicated above, banks are not normally in the business of caretaking for real estate, and they dislike such responsibilities.

The REO must be put into marketable condition. Banks are not set up to deal with the renovation of a property. They are in the banking business and do not have trustworthy contractors that they deal with on a regular basis. They often pay too much for repairs and end up over-improving the property, or worse, under-improving the property. Many banks have a minimal amount of work done to an REO before they put it on the market. They will get the property painted and that’s about it. They wait until there is a contract with a home-buyer before they have other needed repairs done. This often results in the property sitting unsold for months and even years because 90% of homebuyers want a property that is in move-in condition.

HOW YOU CAN PROFIT FROM REOs

You will get the biggest discounts on REOs that need repairs done to them. REOs that are in fair to fairly poor condition can often be purchased for a fraction of their value and quickly resold for huge profits. By targeting REOs that are “fixer-uppers,” you will get tremendous discounts and be able to make good money with them.

Do not buy an REO if the condition is exceptionally poor. Houses with foundation or structural defects are risky investments and should be avoided. If you ever have any doubts about the structural condition of an REO, then get a professional home inspector to perform an inspection on the entire house. If it needs more work done to it than you are willing to deal with, do not buy it. Stick to houses that are in fair to fairly poor condition.

Many REO houses that are in fair to fairly poor condition are listed for sale at reduced prices. Don’t let the asking price fool you into thinking that the bank won’t take an even lower offer. Each bank works differently, but one thing they all have in common is that they want to get rid of their REOs. This represents a tremendous opportunity for you to cash in on REOs.

Timing is Everything
Timing can be important to your success. For example, some banks will sell many of their REOs at the end of their fiscal year or each quarter. They do this because they want to clear their books. Some banks decide to sell their REOs at discounts when they accumulate too many of them. Many banks want to sell their REOs any way that they can and will often accept low offers for them. You probably will not know when the timing will be right, but be aware that timing is a factor that many banks use to determine how low they will sell an REO.

 Therefore, don’t ever hesitate to make a low offer on an REO. Bear in mind that you can always raise your offer if your first is not accepted.

Timing is a factor that many banks use to determine how low they will sell an REO for.
Remember this: To be successful with REOs, you must continuously make offers! If you make one offer each month, it will take you a long time to get a good deal. If you make several offers each week, you will get a good deal much faster. Don’t fixate on any one deal, as there are always many more out there.

You can profit from REOs because banks are eager to sell them. The main things you must know are how to find them and how to get them at low prices. Once you have located an REO at a low price, you’ll find it easy to sell it at a discount.

There are hundreds of REOs on the books in the Texas Coast region, but not yet on the market. To discuss Texas Coast REO opportunities contact:


The Texas Coast region has experienced several major auctions lately, mostly for newer high-rise projects where the units sold for about 50% of retail. Read More.

by Bob Peltier, TexasGulfCoastOnline.com

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