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REO is a term that stands for "Real Estate Owned." It refers to properties which have been foreclosed upon by banks or other lenders.
"Asset managers" are the personnel you'll deal with in REO departments. Their job is to inspect the properties, see that needed repairs are done, and manage the properties until they're sold.
You may be able to find great opportunities in this area if you're willing to learn the ropes and deal with the often tough-minded REO departments of banks and other lenders. This article provides you the guidelines for doing just that.
Guideline 1: Understand the Lenders' Attitudes Toward REO Properties Banks and lenders detest having REO properties on their books. Instead of assets, they have liabilities. Obviously, they want to get rid of these properties; however, they're not willing to do it at a loss if they can possible prevent that from happening.
So, as an investor, you not only have to handle this attitude, but you also have to deal with the fact that banks and lenders often don't like to publicize the fact that they have REOs on their books. They have three reasons for this.
The first reason is that they don't want federal regulators breathing over their shoulders, questioning their business practices or solvency.
Reason Two is that they don't want their depositors knowing about REOs. Depositors want security above all and if, rightly or wrongly, they see REOs as evidence of questionable practices, they may pull their money out. Banks want to protect their image.
The third reason is that when lenders have a large inventory of REOs, they don't want the market at large to know about it. If the information leaks out, prices could drop dramatically.
So, how do you find out about REOs? That's our next topic.
Guideline #2: Present a Professional Image to the REO Department REO asset managers don't want to deal with amateur investors, so you need to approach them as a knowledgeable professional.
First, call the lender and ask for the REO department. Once in contact, explain that you're an independent, professional investor and are interested in buying REO properties and would like an appointment with a decision-maker.
Second, use that appointment to advance your case and convince the decision-maker that you have the assets and experience of a committed professional. If you do your sales job right, then you can ask for a list of REO properties.
Note: Sometimes, REO departments handle the properties themselves; sometimes, they use a broker. So, you should be prepared to deal with both.
Guideline #3: Inspect the REO Properties It's a fact of life that many foreclosed properties aren't in great condition. The former owners aren't happy people so they may not take care of the property or even damage it to vent their anger. Therefore, you'll definitely need to do due diligence and inspect any properties under consideration.
Sometimes, lenders will do cosmetic repairs to a property since they know a more attractive home will bring a higher price. To counter this possibility, I recommend that you try to show up as soon as the property is acquired and offer to take it "as-is" to get a lower price.
Buying REO Properties-the Mechanics There's no great secret to buying these properties. You buy them just as you would any property. First, you make an offer. Then, the lender either accepts it, rejects it, or makes a counter-offer. In the case of a counter-offer, you negotiate.
In regard to payment, most lenders prefer cash because they want to be rid of these properties as cleanly and quickly as possible. If this is the case, you'll need to go to a different lender to get your financing. Just don't expect a great deal; lenders may want 10% or more down plus closing costs. However, some REO departments are aware that they'll get less from a cash offer, so they may offer you financing. The benefit of this is that you may be able to pay a lower down payment, obtain easier terms, and also get some money for improvements. The downside is that you'll pay more in interest and fees than you would on a strictly-cash basis.
Typical Problems to Expect As I said earlier, many of these properties are in bad condition and may not be worth the money, so inspect them carefully before you commit to a purchase.
Also, as I said before, these properties are sold "as-is." This means there is no warranty of any kind. So, if you buy a property that later requires very expensive repairs, you're stuck with that expense. The lesson-perform due diligence very carefully!
In the case of federally-chartered lenders, you may not get a disclosure statement (most states require these now). That means there's the possibility you could get stuck with a property that has severe and expensive problems (e.g., lead paint, etc.).
Finally, if as a result of a home inspection, you find repairs that need to be done, don't expect the lender to pay for them. Their attitude: "It's your problem to solve."
Key Point: When approaching an REO department, be a fully-prepared professional.
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