Foreclosed properties and real estate owned (REO) properties in a bank’s portfolio sell for less than an open market property. Nimble, sophisticated investors with cash on hand often get attractive properties through consistent vigilance. Most REO deals offer discounts because the property is imperfect in some way. Finding great opportunities requires skill, the ability to move fast on a deal, and a solid property network.
Why REOs often sell for less
REOs sell at a discount because banks aren’t in the property sales business. They don’t want to own properties; they’re in the business of lending funds, e.g. mortgage loans, to individuals and investors who do. For that reason, banks are often eager to remove properties from their portfolio. Since the average home, condo, or building ties up the bank’s capital, the institution is frequently willing to sell properties at a discount to the market.
Banks don’t want to add to REO cost basis
Investors aren’t usually in the driver’s seat when it comes to completing the REO transaction. For instance, any item in the contract that requires the bank to spend more money on the property may not be considered. The bank doesn’t want to add to its cost basis on the property. Although some buyers use mortgage funds to purchase these properties, the ability to move quickly—without the constraints or limitations imposed by a mortgage loan—is valued by the bank.
How REO closings differ
Traditional property transactions usually favor the buyer. For instance, if the buyer doesn’t get financing for the property, he or she walks away (while the seller is obligated to uphold the contract terms). REO property sales favors the seller. The bank or other owner is likely to ask for contract flexibility that’s unique to these transactions. The banker may demand the ability to delay or even cancel the deal on an at will basis.