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Buying REO property, for Real Estate Investors

As the credit crunch tightens and real estate inventory piles up, opportunities abound for savvy investors who are prepared and have cash. Here’s how to find em and close em.

REO – Real Estate Owned, term used for homes and properties taken back by banks and lenders after foreclosure.

Banks & Lenders take back properties by foreclosure and usually list them with several local real estate brokers. They can be found on your local MLS and as well as the lenders REO online database.

How to Find REOs in Your Area

Unless you have $10M plus, the bankers won’t talk to you. Your best course of action is to talk to the local realtors/brokers who have the most listings (sellers agents with the most REO listings). These realtors can also provide you with other MLS listings, CMAs, market conditions and keep you abreast of good deals.

Q: How do you find one of these brokers/realtors?

A: Visit the online REO databases of the major lenders in your area, search the zip codes you’re interested in, and look at the listings and the listing agents.  Find the lenders with the most listings in your area and the agents with the most listings in your zip code. These are the agents you want to contact.

Here is a Directory of all major lenders in the US, and links to their REO databases:

REO Listings for Bank Owned Properties of all major Lenders and Government Agencies

Talk to the listing agents, tell them what you’re interested in, listen to their advice, and remember they make money when you buy one of their listings, regardless if it is a bad deal, so do your own due diligence.

Be Prepared

If you are a serious real estate investor, you know how to value a property, estimate repairs, inspect properties, plan an exit strategy, and make offers.  You have identified zip codes that you are interested in and track those markets.  In addition, you have cold hard cash and/or excellent credit.  At a minimum you should plan on putting at least 20% cash down and reserves to cover carrying costs and fix-up.  If you are an all cash buyer better still.  Get pre-qualified at a bank for a conventional loan.

Making the Offer

When making offers, you will get better results if you look like a serious qualified buyer, with no contract contingencies.

  • Money talks, a deposit is essential even if it is only $5k – its better than nothing.
  • Know the value of the property before you make the offer, run comps, get a CMA from your agent.
  • Attach a bank statement showing that you have the rest of the down payment in a bank account (25% suggested).
  • Attach a credit report showing your good credit (black out your SS#).
  • Attach a bank prequalification if you have one – some lenders such as Countrywide, require that you are pre-approved prior to making an offer on one of their REOs.
  • Make lots of lowball offers – many will get rejected, some will get countered, if they are immediately accepted, your offer was probably too high.
  • Follow-up regularly (once per month) and make another offer, maybe raising your price purchase price by 2%.
  • Target properties which have been on the market for more than 100 days
  • Target properties which don’t show well, due to cosmetic flaws or if you’re a good rehabber look at the major fixers.
  • Target properties without good exposure – IE no picture in the MLS listing.
  • Put a time limit on your offer, ask your realtor for opinions on this (my suggestion is 5 business days).
  • Use hard/private money lenders to facilitate faster closings.
  • Consider attaching a cover letter, stating you are a qualified buyer and why they should accept your pitiful offer. Identify all the negatives of the property.  Why it isn’t selling and has been on the market for so long.
  • Find out what the lenders cost basis is, and never make an offer exceeding that amount. The listing agent may have this info. This info is available on some MLS systems (via realist), and can also be found at the county recorders office by looking at the trustee’s deed or the amount of the trust deed/mortgage that they foreclosed on. A title company can also provide this info.

Financing

If you are a cash buyer, use it to your advantage, make cash offers and promise a fast closing, not contingent on financing.  If you have good credit, steady verifiable income and a health deposit, use conventional financing and get pre-qualified.  Hard Money and Private lenders, although more expensive than bank financing may also be valuable tools, allowing you to close faster, and if you will not be holding the properties for long, may be cost effective as well. Most private/hard money loans don’t show up on your credit report, where a conventional almost always will show, and getting a new loan on your credit report always hammers your credit score in the short term.  If your deal is too thin to accommodate the added expense of a hard money loan, it is probably too thin period.  If your plan is to buy with cash or Hard Money Loans and later refinance to a better rate, talk to a local mortgage broker or bank about seasoning requirements. Refinancing may make more sense if you are acquiring rental property or will be selling with lease/option, rent to own, land contract or wrap mortgage.

When you approach your lender have a full file of docs including: copy of credit report, 1003 standard loan application, copy of W2 income statements (or 1099s for self employed), bank statements, and summaries of your successful real estate deals you have done.

A Few Other REO Buying Tips

  • Skip Short Sales – they take too much time and the lenders are not as motivated, at least not in most areas at this time.
  • Don’t buy marginal deals – blowing your bankroll on a bad deal is the surest way to failure. Be cautious and pessimistic when calculating rehab costs, time to resell the property. In a falling market be extra wary when establishing your after repair value (ARV). Better to get no deals than a bad deal.
  • Don’t get over-extended. Pace yourself, there will always be more deals. Don’t bite off more than you can chew.
  • When valuing property – look at active comps as well as sold comps. In falling markets it’s common for active listings to be cheaper than the last sold comps.
  • Look at the inventory and appetite in the zip code. On MLS you can count the sold comps for the last 6mos and the number of active listings. How many months of inventory are on the market now?
  • If you plan to resell the property, plan on pricing it below market value.  You are competing with every other house for sale in that neighborhood.
  • Do your rehab work fast and on budget.  If you will be reselling the property, get it back on the market fast, and sell it fast using creative selling techniques.

Good Luck and happy hunting.

About the author:

James MacArthur is broker/lender licensed by the California Dept of Real Estate.  We are Private and Hard Money Lenders in CA, and work with real estate investors.


The Hard Money Pros
Private and Hard Money Lenders in California
PO Box 91472, San Diego, CA  92169
jmac@TheHardMoneyPros.com
www.TheHardMoneyPros.com
(619) 846-1550

©Copyright 2006 JMAC Funding

Licensed by the California Department of Real Estate, DRE# 01440161