Real Estate Owned (REO) Foreclosures and VA/HUD Properties

REO Properties, as I am sure you know, are properties that are owned by banks. The primary reason that they are owned by a lender is that they were foreclosed on and there were no bidders at the foreclosure sale, thus the lender took them back. VA/HUD Auction Properties are properties that had loans backed with VA or a HUD guarantee. Those loans were foreclosed on, with no successful bidder at foreclosure, and the property thus reverted back to the VA or to HUD.

Generally, the easier it is to find a deal, the higher the price you will pay. The great bulk of investors do not know how to find deals in the way that I do with the techniques that I teach in my course. They thus go after the properties that they can find-listed properties, REO properties (which are typically listed), and the VA/HUD Properties. Because so many people with limited experience and larger checkbooks can find these properties, the prices paid are too high to make any real money.

On REO properties, remember that the lender will typically bid at the sale for the amount they are owed plus interest, penalties, and legal fees. If there is equity in the property beyond this point, other bidders will bid above the lender's opening bid until the bidding stops with a successful bid. REO properties are by their very definition lacking in equity. Otherwise, they would have been sold at the auction.

The sole exception to this might be if no one showed up at the auction, but in my market, as in most, there are plenty of people bidding at the sales. Most do not really understand what they are doing. They buy one property for too much money and are never heard from again. The next month, someone else steps into their shoes. This makes it tough to make a living at a foreclosure auction for real investors. We like the pre-foreclosures before the sale. Fewer people are willing to work on those even though there is much more profit in them.

Lenders now are showing an increased willingness to repair REO properties before putting them on the market. In past years, they would put a sign out in the yard after they took the property back. Typically the house needed work, scaring off owner-occupants, and leaving investors as the only buyers. It was possible to get a decent deal on a house like that. Now, lenders have found it to be a better move to go in and fix sheetrock, paint, and generally clean up the property. They can sell directly to owner-occupants and get a much better price on the property. Thus, many REOs are too pretty and nice to get the kind of price we want to get on them.

Even lenders who don't fix are a little stubborn as well. They often get an appraisal on the property and price the property as if it were in better condition. Remember that they probably made a loan relatively recently on the property (hence there is no equity in the property), and they had an appraisal done at that time. The lender thinks that this appraisal was probably right, and will feel justified in asking for that amount or more. They will not entertain or accept any offer that is not near to their asking price. After months and months of not selling, lenders may come around and be willing to take less, but it takes time. Typically if you give a house enough time, a homeowner or the ignorant investor will come in and spend too much on the property before enough time elapses to pay what it is really worth.

Finally, on REOs that are actually priced well, your odds of getting them are very remote. Unlike dealing with private sellers, where I can make an offer today, and no whether or not this offer was accepted within 24 hours, lenders move VERY slowly. It may take two weeks or more to hear back from them. Everything decided by committee. And during that time, guess how many other investors have seen the property and made offers? Lots. And what are the odds that your offer will be the highest of all of those, when many investors are not afraid to overpay? Not great. Thus, even on the few good deals, the knowledgeable investor has the deck stacked against him or her.

The one exception to this is if you find a REO that is SO torn up that it scares away all of the new TV seminar graduates or doctors who decide to buy a couple of homes as an investment. However, these are fewer and farther between now that lenders are fixing up these properties themselves. Also, most REOs have recent loans, so the odds of the property falling apart since the loan are remote.

REO listings are often controlled by a relatively small number of agents in a given city. Thus if you are not in the loop, it is hard to hear about the good deals before the rest of the world does. If you ARE in the loop, and can find these “pocket listings,” there may be some potential in this area. However, subscribing to a list of REOs in your area, or waiting until a deal hits the MLS system is usually not a way to proceed and make money in this area. I typically thus advise against subscribing to such services, which have dated information at best. You are better to have a relationship with a Realtor to find REOs in your area if that is what you are interested in doing.

VA/HUD Properties are not the best deal in the world for most investors for similar reasons that the REOs are not. These basically are REO's that are owned by HUD or the VA. Thus the same considerations apply, and we do not need to rehash those again.

The primary problem with these deals is that people buying these homes to personally live in them are able to bid on the property before investors are able to bid. Thus, the really good deals are picked off first at this stage. Many investors lie and say that they are going to buy for themselves, and later “change their mind.” I am not comfortable doing that, and do not believe in committing fraud to obtain houses. There are too many deals out there to move into these murky waters. If you are truly looking for a personal home, this is an area to check out, as once in a while a few homes are wildly mispriced. The scraps left to investors after the owner-occupants have had a chance to buy or pass are not worthwhile in my book.

A relative has an interesting strategy that he uses to buy these properties in Florida. He helps his kids (over 18) buy them in the town where they live and go to school. They live in the home for a year and resell. Enough is made on the homes to pay for the mortgage payments plus a little extra. On some, the properties are rehabbed after the kids move out, so more money is made. If you have college age kids, or will soon, this is an interesting strategy to think about. It is the only way that doing these types of houses makes sense to me.

I hope that this information has been helpful, and not too discouraging! I am asked my take on these subjects quite often, and I thought that every one would benefit from this info. I want to make sure that you spend your time looking for deals in the best fishing holes, and not where everyone else already has a line. I know that some people reading this will have done some good deals on REOs, and I do not doubt that there are some out there.

However, my goal is for you to spend your time working only the most lucrative markets, and not to spend time looking for deals where they are harder to find, and where there is much more competition. In my career, I have encountered very few good deals, and the slow committee-like manner that the banks evaluate deals leads to many other offers competing with mine because of time delay.