Real Estate Owned (REO) Foreclosures and VA/HUD Properties
by David Whisnant
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.
Bio:
Dave Whisnant is an Atlanta investor/attorney who is dedicated to helping people
land their first deals and create whatever level of success in real estate that
they desire.
After successfully building a real estate law practice, Dave walked away from it
to focus on real estate when he saw the profits that his clients were making.
Jumping in with both feet, he created a proprietary model that rocketed him to
the top of Atlanta investors almost from day one.
Dave is different than other investors in his single-minded quest to perfect a
series of cutting-edge prospecting tactics to locate and then land motivated
sellers who other investors are not even aware of.
A master investor AND teacher, Dave’s precise and easily duplicated systems have
been successfully implemented by his students around the country in competitive
markets of ALL kinds.
He believes in freely sharing his expertise and information for the benefit of
anyone who is serious about succeeding, and believes that his techniques will
create more success stories per student than any other real estate investing
coach in the world in 2006.
Real estate investing has enabled Dave to have the freedom that enables him to
spend time with his two young daughters, wife, and “herd” of golden retrievers.