Buying REO Properties: Step 1

To purchase REO Properties, you must first locate the property that is best for you.

Do you want a property that is near where you live currently?

Do you want a property that you don't have to put a lot of money into to get it going?

Do you want a property that you can live in while fixing up?

Do you want a property that is in a good rental market?

Do you want a property that you can buy and flip immediately?

Your Criteria

It is very important to identify your criteria for an REO Property. There are truly THAT many of them, that you can honestly pick and choose. So, first identify what is important to you in purchasing a property.

Potential Scenario #1: Let's say that price and rental market are the two most important requirements for your REO Property. You know that you only have $25,000 (made up number) to invest. You want the property to be in a good make where you can get about $800 per month by renting it out.

You scan through websites that have REO Properties. How do you find these sites? Here's the hint:

Remember, REO Properties are bank-owned properties!!!

So, just look on the websites of different banks and lending institutions. Almost every bank has had to foreclose on a property at one time or another. Think of all the banks you know and check their websites.

Long time ago, one of the secrets of real estate investing was knowing the "in" person at the bank. This was the person who could give you the information of what properties were REO Properties and how much you could get it for.

With the technology of today and probably because of the vast number of REO's, banks put this information up on websites.

A word about "Foreclosure Lists".

"Foreclosure lists", in my opinion, are a relic of the past. "Foreclosure lists" used to be hot items several years ago. They may still be today.

A "foreclosure list" is simply a list of properties that have been repossessed by the bank. It's a list of REO Properties. Well, that sounds good, right?

Of course... if you want to pay money for outdated information. I remember buying a precious "foreclosure list" years ago. I was so excited to get it. I just knew I was holding a gold mine in my hand!

So, now that I had it, I proceeded to find my first REO. I investigated the first listing. It had already been sold. Shucks, someone got it before me. Cool, no problem. I HAVE A WHOLE LIST!!!! On to the next one!

The next one was sold, too. The next one? Already gone. Next? Gone, too. Next, next, next??? All gone. Turns out I had paid $50 bucks for a list of properties that were ALL SOLD, probably before I even wrote out the check.

The Process - What happened?

Remember the foreclosure process outlined in the foreclosures section of this website? To quickly recap, First there's a Notice of Default filed at the county recorder's office. If the default is not cleared the property goes to auction and the bank usually gets the property back at the auction. Then they hire a real estate agent to sell it.

Well, long ago, the banks didn't simply put the properties up for sale with agents. The bank employee who had the list of all the properties from the auction, became the "in" person. They would give the list to specific agents. Somehow, a cost was generated for this list and then it became available to the public.

I remember driving to a real estate office on the corner of Indiana and Van Buren to get my "list". As far as I was concerned I was going to pick up my gold! That's why I can still remember the corner that I drove to.

So, what happened? What I figured out eventually -and it makes perfect sense- is that the real estate agents who had the lists purchased the best properties on it. After all, they had first dibs, so to speak. They simply scanned the list, visited the best REO's in person, and quickly purchased those.

Agents also have the team members set up. So, they know the mortgage brokers who can get them the loans. The agents pick off the best REO houses. Then they can pass on the remaining "good deals" to team members, family and friends. THEN, they can even make a few pennies off of people like me who wanted a "list" of foreclosed properties.

Current Lists

Contemporary lists might be a bit better. This is because the list is generated from the information found at the County Recorder's Office (CRO). Anyone can go to the CRO and view the NOD's (Notice of Defaults). They have computers set up and you can sit there for hours copying down names and addresses.

You can then turn around, organize your research into user-friendly format, and then sell it to other people who want a "list". You've done the all the hard work and now you can become an entrepreneur and get paid for it. Other people don't have the time, energy, or inclination to sit in an office all day -not getting paid- looking at a computer screen and copying names and addresses.

So, that could be your new real estate investing business. Creating lists of REO Properties and selling them for $39.95 each.

Lists of today are definitely better than the foreclosure lists of yesterday because the information is more up-to-date. The difference is that they are lists of 'potential' REO's. You will be calling or visiting homes where people live who are losing their house.

These people might eventually clear the NOD and thus the house never reaches the final foreclosure phase. So, the drawback of today's lists is that you again have to mine the gold to find a property. And do you really want to call people who are already in financial trouble and are losing their home and try to get 'that' particular house??

Buying REO Properties: Step 2

In the first step, I outlined different ways to identify an REO Property to purchase. After you have found a potentially good property you simply go through the process of submitting an offer. Get an agent to fill out a purchase contract for you and that's how you submit your offer.

Once your offer is accepted, you purchase your property. Refer to the section on REI Loans for information on different loans and sources of money.

Step 2 in this process is doing the rehab. Now this is where you have to have strong team members who know what they are doing. If you have the skills to do property rehab, great! If you are going to live in the property during rehab and for a time period afterwards, that's even better because you get the tax breaks. Again see REI Loans.

But it is very important that you ensure that repairs and structures are up to code. Optimally, you would want to make sure that your house can pass a city inspection or even a Section 8 inspection. They are quite rigorous in their criteria.

Whether you live in this house initially or not, you may eventually want to rent it out. This is where your bread and butter comes in. Always leave this as an option, just in case you need to hold on to it for longer than you wanted (i.e. you wnated to buy, rehab and flip but the market is down).

When you meet with your rehab team, please make sure that you outline EXACTLY what you expect them do and GET IT IN WRITING. Also get in writing a completion date. Another suggestion is to negotiate in writing an "If it's not completed by XYZ date..." option.

I recently had a property rehabbed with a estimated completion date of 3 weeks. Three weeks ended up equaling 7! I hadn't written in a time contingency so all I could do was just wait.

With a different rehabber I'm working with, time contingencies are standard in his contracts. He admits that if he is not done when the contract states, he will deduct $100 per day from the estimate.

Buying REO Properties: Step 3

Step 3 is the easy and fun part about buying REO Properties. Here is where you make money. There are two primary option$$.

Option #1: Rent out the property

Option #2: Sell it.

I suggest you decide on the best option for your situation BEFORE you even purchase the property. Know your exit strategy. (See REI Strategy). My section on Rental Properties also provides some insight into making money with this Step 3 option.

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