Finding the right property... foreclosure or REO?

I am interested in flipping a home, but am having trouble determining weather I should start by looking for an REO or a foreclosure. I am thinking that an REO would be easier to find, but I am conserned that if the property was even close to being a profitable one, that someone would have snached it up already before it even made it to REO. I admit I am a complete noob… I just started poking around the forums here about a month ago, but I would love some experienced input on this. As this would be my very first investment, and I already have a full time job, I would rather my first be an easy, fairly quick flip. I am a general handyman, so I can do pretty much any household plumming, electrical, drywall, tile, and so forth… I’d be looking at holding the property 3-4 months at a max. So given these basics, is it even worth my time trying to find a property to fit the bill given i’d be paying realtor fees and such?

Thanks,
-J

J,

there is no clear answer for you on this…REO’s and other properties have there own personalities so to speak…you should first define what is a quick flip in your mind and weigh your options interms of what would be easier…Banks are a pain to deal with…unless you have an inside connection with a bank regarding foreclosure you could find yourself spending fair amount of time trying to track down the correct person to help you regarding the purchase of one of these properties…

argent 8)

ThunderChicken,

Yes, REOs can be an excellent source of properties to invest in. I’ve bought many of them at hugh discounts (40 to 50% of market value). Don’t have a defeatest attitude - properties that are great deals OFTEN become REOs without someone snatching them up. There often is no deal to be made with foreclosures until the property is taken back by the bank. REOs require a down payment and a pre-approval letter or proof of funds, something that is often impossible for many wannabe “investors”, who have no money and bad credit.

I’m not sure what argent is talking about in his post. REOs are listed with Realtors and you do not deal directly with the bank.

It does not matter what the Realtor fees are or what anyone else is making - the only thing that matters is what YOU are making. Personally, I think it’s great if both the Realtor and I can both make money.

Good Luck,

Mike

propertymanager:

How are ya? You said you sometimes get reo’s @ 40-50% fmv, did you negotiate the price down to that or was it already listed at huge discount? If you did negotiate it, could you explain a little about how to go about it, and are the banks really interested in taking that big of a loss?

Thank you

Also in your experience have you noticed certain banks that are more willing than others to sell at a higher discount?

Mike,

I was referring more to the foreclosures in my post eventhough I mentioned both!!!

Argent 8)

JS,

Working with REOs is quite different than working with a typical homeowner. Banks are usually quite inflexible and very frustrating to work with regarding their REOs. I always offer (and pay) less than they are asking, but they normally will only drop the price a few thousand dollars initially.

In my experience, the key to getting a great deal with banks is patience. I have literally worked deals for several months before the bank would drop the price to my target. I just wait for them to get motivated to sell and I keep making periodic offers. Eventually, they will sell. This frequently works with individual owners as well. If they don’t take your first offer, periodically re-submit your offer. You neven know when someone will give up and take your offer. So, there’s not a lot of negotiating - it’s more like waiting them out!

There are literally thousands of banks in this country and I have yet to buy more than one REO from the same bank. For some reason, many of the mortgages here in Ohio are held by California banks. Therefore, I haven’t seen any trend in which certain banks are more willing to take a deep discount. I think that a bank’s willingness to take a deep discount is more a function of the number of bad loans they have, than some internal bank culture issue.

Good Luck,

Mike

Thank you very much for your advice. I have no problem getting initial cashflow to buy the reo, so I think i am going to contact my agent and see what he has to say.
Thanks Again,
-J

propertymanager:
Thank you for your sound advice. I have enlisted the help of a realtor friend of mine, and I have been in a ton of houses. for now I have limited my target to one area that I studied and become VERY famiiar with. I have located a few potentially good rehabs, so now I guess the wait begins. If you think of anything else that might be helpful feel free to let me know

Thank you
js

If you are just starting out in REO’S ask around and find out which realtors deal in these. In my city, there are only a few who specialize in these properties and are usually very willing to work with investors. One of my first deals was an REO that I purchased for 25% of after repair value. The realtors did all the work and it went smoothly…so, there’s money to be made!

Good luck!

Mark :slight_smile:

Property Manager,
I’ve been avoiding hooking up with an RE agent because I have yet to find one here that will let me pursue FSBOs and people that seek me out/call me directly/contact me however without charging some type of commission. But I know REOs are only listed with agents.
However, in talking to one yesterday, he sent me some links to some REO properties here. THere is one I may actually go and see. My question to you is thi; how much do you invest up front in these properties. For example, the well and septic here need inspection. There might be lot encroachment. And of course the whole thing should get an inspection anyway, but what I guess I’m asking is how much should I anticipate putting into an REO property before I even make an offer – I don’t want to spend hundreds of dollars unnecessarily.
And what, if anything other than price, is negotiable with the banks? I’ve read you can negotiate everything, and I’ve heard you can negotiate nothing. I’m willing to submit what I feel is an offer I can live with over and over like you said, until it sells to me or someone else.
Any advice would be appreciated!
Thanks!

Immy,

I would look for a brand new, young real estate agent - one that is just out of school and is hungry. I’ve found that these are often your best bet. Mine was only 20 years old and fresh out of school when I met her and she has done and is doing an outstanding job.

I don’t invest anything in properties before my offer is accepted. I inspect the houses myself and KNOW the property values in my area, so I don’t need comps. I usually make an offer within 20 minutes of seeing the property for the first time.

If you don’t feel comfortable inspecting the house yourself, I’d suggest learning this skill. You can take a property inspector class, read some books, and/or have a qualified friend help you.

Banks are very difficult to work with. They usually insist on using their contract and do not allow many (or any) contingencies. Normally, they will not negotiate on much of anything but price. You can NOT assign the contract with REOs. They often give you a Special Warranty Deed as opposed to a General Warranty Deed. The difference is that they are only giving you a warranty for title issues that have occurred while the property was owned by the bank. In my opinion, getting title insurance is absolutely necessary when purchasing REOs.

I would not spend a bunch of money on a survey unless I was certain that I was getting the house. You can try to put a contingency in the purchase contract for a survey and you may get it. What kind of encroachment is there - is the REO encroaching on neighbors or are the neighbors encroaching on your REO? Why do you believe that there is encroachment? What will you do if there is encroachment? Would you buy the property? I’d answer all these questions BEFORE spending a bunch of money on a survey.

Another consideration is the risk/reward of this deal. Do you think that you can buy this property at a low enough price to make the expense (in both time and money) worthwhile? What if there is encroachment and it needs a new septic system? All I’m saying is that the profit needs to be high enough to justify making an offer on a property with all these issues.

Mike

PropM,
The lot encroachment is listed in the MLS remarks, along with the note about the well and septic. It doesn’t say who is encroaching on whom. . The agent is already checking that out. It says the house needs repairs and is “priced accordingly,” which the agent who sent the listing to me said means caveat empor! (or however you spell buyer beware in Latin! I just woke up so my spelling abilities are failing me a little!). I would definitely buy title insurance if I was to make an offer on the house. My plan is to get a contractor to go look at it with me just so I have a more educated guess as to the repair estimates. I also need to know the DOM in this neighborhood, it’s kind of rural so that would be a big factor in deciding whether to pursue this = I don’t want to rehab a house that may not move for 6 months after the rehab and we are going into winter now. . .
I appreciate your post - it seems like I was on the right track with my thoughts.
Thanks again,
Immy

Immy,

You don’t spend ANY money on ANY property UNTIL you have a signed contract with the seller. Doesn’t matter if it’s a FSBO or a REO.

After you have a contract, then you can get inspections on the property. PM is correct, in that in most cases, a negative inspection will not warrant getting you back your deposit, but it’s better to lose a little deposit than buy a big profit LOSS. And it may be possible to get your deposit back as some banks will sign with the contigency.

If you suspect a big problem, you have to make your offer based on that. For example, here there is a REO that is listed for $400K (which is an expensive property here) and is worth about that or a little more FMV. It needs about $10K or so in fixup work (mainly high-end sprucing up) to actually sell FMV. The problem? The house sits 2 feet OVER the property line. We’ve asked the lender if they are going to fix the problem or sell “as is.” (which legally, they can’t do in NC because of the property line issue) Our offer was $300K with the lender fixing the problem or $200K with us fixing the problem. Offer is still on the table, but we made it based on what I feel may be our costs to get it fixed (which worse case, is to buy the property next door).

Raj

What persentage usually should you expect to put up for a deposit for an REO?
THanks,
-J

That depends on a great number of things.

Sometimes, the banks have a minimum earnest money deposit requirement, so you’ll have to at least put that amount down.

Most often, there is a local custom of minimum earnest money deposit. For example, here it’s $500-1000 is “standard.” If you put less than usual for your area, it’s very doubtful if the listing agent will promote your offer much.

And finally, some say that if you put down more than normal, for example, 5% of your offer, that that makes your offer more compelling. In essense, you’re risking a large deposit, so the lender thinks that your “serious” in your offer. In my experience, that isn’t true. The only thing that makes the lender take you more serious is your ability to close the deal, ie a good pre-approval letter or better, proof of funds letter. In fact, the only time that putting more down as made a difference for me was when I made an offer with a copy of the check for the full amount.

Raj

Got it. Is that the only way to fix a property line problem - buy the prop next door? 2 feet over the property line - wouldn’t you have to move the house? I know that sounds stupid but I’m curious! :-\

In all honesty, I really don’t know what you’d have to do. I do know that buying the property next door would be the worst case scenerio.

Other possibilities, of the top of my head, are: buy 3 feet of the land from the next door owner (gives you 1 foot clearance). Get an easement agreement with the next door owner acknowledging the situation and okaying it, try to buy the property anyway and hope that it goes through, thus avoiding the problem altogether (this one, btw, is a very bad choice).

Moving the house is another possibility, but, in my opinion, isn’t as feasible as buying the prop next door, because this is a LARGE house with a cellar. Moving it, only a little, will probably cost more than buying the prop next door (not to mention the rehab costs to the inside of the home from the lift and set).

Raj