Have you ever wondered what happens to foreclosures that don’t sell at auction? What does the bank do with them? Just hold on to them and lose money? Of course not! The bank is in the business of lending, not holding property. The best way for them to unload their inventory is to sell the property as fast as possible.  These kinds of properties are called bank-owned REOs (REO stands for Real Estate Owned) and they differ from foreclosures in some significant ways.

The biggest difference between an REO and a foreclosure is that a foreclosure is being sold to satisfy the terms of the loan. If it doesn’t sell and satisfy those terms then it goes back to the bank and is now a liability to the bank. A banks assets are its loans, their REO properties are their liabilities and they generally want to get rid of these as fast as possible. This is why REO’s usually make for a great buy.

Another big difference between foreclosures and REOs is that the foreclosure is sold “as is,” meaning that whatever damage is done to the house by the previous owners becomes the buyer’s responsibility. With an REO the bank will often do some fixes to the property to make it more appealing to buyers and easier to sell. Not to mention you will usually get an inspection period.

To be able to invest in an REO the first thing you need is a team of people to help you through the process. This team should include an attorney familiar with real estate law, an accountant, a real estate agent who specializes in REO properties, a real estate coach, and a contractor. These people will all be able to give you solid advice about your investment and how much it will really cost to own, renovate, and sell the property.

Second, you need a lot of patience and fortitude.  Fairly often, buyers end up NOT getting a great deal on REOs because they lose patience and don’t stick to their guns during negotiations. Be patient and arm yourself with information about the property so you can negotiate for your price effectively.

Third, get educated about your property. While you are being patient with the process evaluate the property you are interested in from every angle. Look at curb appeal, location, foot traffic, nearby amenities, noise, crime issues—everything a prospective buyer would look at. Take your contractor with you and have him or her help you figure out how much it will cost you to get the property ready to sell.

Eventually the process will see itself out and you will either end up the owner of a great property for a great price or you will move on to the next property. Whatever the result you can know that you spent your money wisely!

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