The recent foreclosure crisis led to a glut of foreclosed and bank-owned (REO) properties on the market–some selling for literally pennies on the dollar. For the savvy investor, these properties represent a great opportunity to obtain multiple rental properties for less than the cost of one rental at market rate.
However, purchasing foreclosed or REO properties is not as simple as purchasing through a real estate agent. Because these properties are often in a state of legal flux, there are many additional hoops to jump, and you must act quickly. Read on to learn some of the secrets of successful REO investors.
1. Have a good inspector.
Many foreclosed properties have extensive damage which may be undetectable to the naked eye. In some cases, before vacating the house, the foreclosed borrower lapsed on normal maintenance (or even took steps to damage or deface the property).
In other cases, after the home became vacant, it may have become a haven for opportunistic pests – including humans. Copper pipes and wiring are especially attractive to would-be thieves. Since these homes are generally unhooked from utilities after the foreclosure takes place, it can be difficult to test that the wiring and plumbing is in working order.
A good inspector will help you identify any issues that will need to be fixed after buying, as well as help you evaluate whether the cost of these fixes will exceed any savings you may get through the low purchase price.
2. No contingencies.
Although it is always wise to inspect a home before making an offer, when the house at issue is a foreclosure or REO property, any defects turned up by the inspection will need to wait. When buying a non-foreclosed property, there is usually room to negotiate allowances to fix problems or require the sellers to fix these issues themselves before closing.
However, banks are not in the real estate business, and if you make your offer contingent on any action from the seller, your offer will likely be rejected (or worse, ignored). Simply factor the cost of any repairs into the purchase price you offer.
3. Cash offer.
The key to successfully bidding on an REO property to buy lies in the fast cash offer. Obtaining financing for foreclosed properties can be challenging, and the financing process for even non-foreclosed properties may be time-consuming. Banks want to unload these properties as quickly as possible, and a no-contingencies cash offer helps them do so.
Once your offer has been accepted, you may be able to take out a mortgage or home equity loan to help finance any necessary repairs.