What is an REO property? You may not know it, but a real estate-owned (REO) property is one of the most lucrative investment options available. Why? It’s because REOs are properties that have been repossessed by the bank and are put back on sale, often at a more manageable price. Interested? Let’s dive in a little deeper to uncover what an REO property is and how it works for investors.
Key Takeaways
- An REO property is a bank-owned asset that failed to sell at a foreclosure auction.
- Real estate-owned properties typically sell at a lower-than-market price, offer better transparency, and provide wide opportunities for income generation.
- Despite the lower acquisition cost, REOs often require a significant budget for repairs, development, and maintenance.
What Does REO Mean in Real Estate
As one of the apartment management companies San Antonio landlords, property owners, and investors trust, we understand that REOs, or “real estate owned,” are properties repossessed by a lender (typically a bank) that are put up for sale. However, there is a whole process to it. Let’s start from the very beginning.
The first thing that happens is that a property is foreclosed by the bank because the borrower has defaulted on their payments. When they do, the lender takes back the property and tries to resell it at a foreclosure auction to recover losses. However, even this is not ensured. If the property is still not sold at the auction, it is now taken under the ownership of the lender and officially gains the REO status.
Why Banks Sell REOs
Now, you might be thinking, why do lenders want to sell REOs? Well, this is primarily because once a property becomes real estate-owned, they become responsible for the maintenance, insurance, utilities, as well as taxes. Because of this, they are bleeding money on the REO property and are more motivated to sell to avoid further losses.
Pros of Buying REO Properties
Even at first glance, investing in an REO property sounds like such a good investment opportunity. Since you’re buying the property below market value, there’s so much room to develop it into a lucrative income property. But what exactly makes REOs special? To give you a better idea, let’s take a closer look at the advantages of buying a real estate-owned property.
When we talk about real estate investments, one of the biggest factors at play is the financial resources it requires to acquire a property. Now, a huge benefit of REOs is that these are typically sold at a relatively lower price. Often, even lower than the current market value. This is because banks (and other lenders) are eager to take REOs off their hands and responsibility. Otherwise, they’ll continue to shoulder the carrying cost while the property is left sitting vacant.
Aside from this, REO investment deals generally offer better transparency, reducing legal risk. Considering that most REO properties are listed on a multiple listing service (MLS), investors like you have greater access to the property to conduct in-person inspections, property walk-throughs, and the like. This is something that you don’t get when you buy a property from a foreclosure auction, where blind offers for a property are the norm.
Speaking of minimizing risks, the fact that REOs are handled by banks or lenders also provides you with a cleaner title upon purchase. This is because REOs go through what we call a “title-clearing” process before they’re put up for sale, keeping you safe from any unpaid liens or title defects.
Cons of Buying REO Properties
While we’ve mentioned the benefits of investing in a real estate-owned property, there are still points for consideration. Particularly, the challenges and risks that come with buying a long-foreclosed property. So, as an investor, it’s critical that you understand the totality of what you might be getting yourself into.
First and foremost, banks sell REO on an as-is basis. This means that the bank won’t be making any repairs, conducting inspections, and the like. Simply, the bank won’t be prepping and dressing the property up as a realtor does to encourage a sale.
So, if the property is worn down, overgrown, etc., you’re acquiring it in that condition. Not to mention that you will also have limited disclosure from the lender. Given that they haven’t really lived in the property and that it stood vacant for some time, you won’t exactly have a complete and in-depth idea of the true condition of the property.
Because of this, another drawback of REOs is the potentially high upfront cost of rehabilitating the property to make it livable. On top of that, you also need to account for the time that the property will remain unlivable, and therefore un-leasable. Simply, you won’t be generating any rental income while the property is still undergoing construction, renovation, or repair.
In some cases, there may even be issues with tenancy. In particular, some REO properties for sale may still have tenants living in them. If becoming a landlord is not part of your strategy, having to deal with active leases on an REO can be more complex and challenging. If you plan to evict the existing tenants of the property, Texas law states that you must provide them with a notice to vacate (at least three days) before you file for eviction. Even then, going through this lengthy process can further delay your plans for the investment property.
How Bay Property Management Can Help
Real estate-owned properties offer investors an opportunity to acquire a property at a lower cost and allocate their resources toward rehabilitating it into their dream income property. However, this is easier said than done. Before you commit to purchasing an REO property, you need to know what the pros and cons of buying one are to know if it fits with your investment strategy.
Ready to take the next steps? Then it’s time to partner with a rent management company, like us at BMG, for your property management and investment needs. Whether you need professionals to handle the day-to-day operations of your rental property, or need insight into the local housing market for your next investment, we’ve got you! Contact us today to find out more.