Having done both, REO’s are easier, but both have risks.
Depending on the state you live in, here in NY state, there is a law called the “Home Equity Theft Prevention Act” , which just went into effect on 2-1-07 that severely proscribes what an investor can do, and limits the profit by law, and allows the sale to be rescinded within a two year period under certain conditions, besides a 5 day period where the seller can cancel. This is after numerous “foreclosure rescue” complaints through the years. See:
NY is not the only state with statutes regulating “foreclosure rescue” investing.
In fact, law enforcement had taken it upon themselves in some cases. The New York Post reported this week the arrest of two attornies, who made up several back payments for an elderly lady, in return for her deeding them the house. The complaint was she received a little over 20K for her equity, whereas the actual equity was well over 200K.
I don’t know about you, with homes going for 400K to 500K in the NY area, what investor is going to muck around with a foreclosure rescue, where they give the poor lady her entire equity, and collect a few dollars in fees, to avoid arrest. Might as well broker it, or “bird dog” it.
As to REO’s, I was active in it in the last down market. Just make sure it’s sold “free and clear”.
I bought an REO free and clear at auction for a 210K bid, after researching public records and noticing the one right next to it was sold as an REO a few years before for 215K.
I spoke to the owner of that property some years later, and he said he wasn’t aware of the “free and clear” part, and wound up paying about 40K in leins, making the total purchase 215K+ 40K or 255k. The bank I bought mine from paid off the outstanding leins, which came out to 40K as well.
Most REO’s around here are sold thru brokers nowadays, and in the hot market that we’re in the last few years, were mainly sold at “market” prices.