An Investor's Short Guide to Approaching the REO Market

REO is short for "Real Estate Owned." These are properties that have been foreclosed upon by a bank or other lender.

The REO department is staffed by "asset managers." Their job is to inspect the properties, make the necessary repairs and operate them 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 will give you the guidelines for doing just that. Understand the Attitude of Lenders Toward REO Properties Naturally, lenders don't like to have REO properties on their books. Instead of an asset, they have a liability. Equally naturally, they want to get rid of these properties, but they're not willing to do it at a loss, if at all possible.

Not only do you, as an investor, have to deal with this attitude, but you also have to deal with the fact that banks often don't like to publicize the fact that they have REOs on their books. They have three reasons for this.

First, they don't want federal regulators on their backs, questioning their business practices or solvency.

Second, they don't want their depositors knowing about REOs. Depositors want security above all and ifrightly or wronglythey see REOs as evidence of questionable practices, they may pull their money out. Banks want to protect their image.

Third, if 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. Present Yourself As a Professional to the REO Department A lender's 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.

Then, use that appointment to present 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, be prepared to deal with both. Inspecting REO Properties As you might expect, many of these foreclosed properties aren't in great condition. The former owners aren't happy campers so they may not take care of the property or even damage it to vent their anger. So, you'll definitely need to do due diligence and inspect any properties that you're considering.

In some cases, 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. The Mechanics of Buying REO Properties There's no secret to buying these properties; you buy them just as you would any property. First, you make an offer. The lender either accepts it, rejects it, or makes a counter-offer. In the case of a counter-offer, you negotiate.

In terms of payment, most lenders prefer cash because they want to be rid of these properties cleanly and quickly. 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; that lender may want 10% or more down plus closing costs. However, some REO departments realize that they'll get less from a cash offer so they may offer you financing. The advantage of this is that you may be able to pay a lower down payment, get easier terms, and also obtain some money for improvements. The disadvantage 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 lessonperform 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. As far as they're concerned, it's your problem to solve.

Key Point: When approaching an REO department, be a fully-prepared professional.