Buying REOs (bank-owned properties)

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Recently, I’ve written offers on REOs (“real estate owned” – this is short for “owned by a bank because they foreclosed on the last owner”) for three readers of this blog. A lot of people are interested in these kinds of properties, either as potential flips or to fix up and hold as income properties. Why? Because they’re generally cheap.

But here’s the problem: Everyone knows that REOs are cheap and can be good deals. When we were buying in 2009-10, there was little-to-no competition. Now there’s tons. So your offer needs to stand out from the crowd.

If you want to buy an REO property (and especially if you want to work with me to do it) here’s what you absolutely, 100% have to do:

1. Come in strong

This isn’t 2009 when the banks were desperate to sell and there were no buyers. There are a hundred other guys just like you, with the same amount of money you have, who can all see the profit to be made in the deal. So you’re not going to steal the property. Figure out (or let me help you figure out) what the maximum amount you can sensibly pay is and offer that. There’s no prize for making 100 offers on properties and never getting one.

2. All cash offer with proof of funds

Put yourself in the position of the asset manager at the bank. Imagine you have 20 offers all around the same price. Are you going to accept the offer from the guy who’s offering all cash or the one who is offering to put down 20% and then hopefully get a loan? You know the property is in bad shape; you suspect that a lender might balk at loaning on it. So your answer is obvious: choose the guy offering all cash.

3. Short contingency period

Once a bank decides to sell, they want the property gone yesterday. The listing broker also wants the thing gone and his commission paid. So you can’t ask them to let you tie up the property while you take three weeks to make up your mind. You need to offer to remove contingencies after seven days. I know this sounds crazy; that’s why you need to work with a broker who comes prepared to help you evaluate the opportunity quickly and thoroughly. When I do one of these deals, I have my entire inspection team there, all at once, within a day or so of going into contract.

4. Quick close

If you’re buying all cash, there’s no reason to extend escrow much beyond the end of the contingency period. After all, all you’re doing at that point is wiring in the cash and closing. So I recommend offering to close in 14 days total (including the seven day contingency period).

Remember: Even if you do all of the above, you’re still going to miss on most of the REO properties you bid on. But, when you do get one, it can be like a license to print $50-100k. Not bad, right?

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