Buying REO v Owner Occupied Properties

I'm constantly emailed by Ziillow customers asking to see the latest REO that has hit the market by buyers. It's across all media's Facebook is bombard with ads "find the latest REO/Foreclosures in your area" if you sit down and watch HGTV you'll see some show that buyers buys a bank owned property and 6-8wks later after running over budget they manage to turn it into the prettiest house on the street and make a five figure profit. Is it easy and glamorous to buy a bank owned property compared to an owner occupied home? What should you - the buyer be aware of when dealing the an REO?

Looking at the MLS right now, in the footprint that Holton-Wise manages (West Cleveland) and I advise clients to buy within there are 159 properties in the market to buy under $75,000 (Cleveland median house price). Only 18 of these homes are bank owned or HUD properties, that's 11% of the market. That's a small percentage and Facebook REO advertisers makes it seem they are just flooding the market and banks just want you to take them off their hands.

On the contrary, I've done 3 REO's in my 4 months as an agent and they have been some of the worst deals to put together for buyers. Not because of the massive amount of paper work, REO properties have their own 10 page contract which if you read them pretty much say we are the bank and we have the power to do as we please. It's the negotiations buyers don't understand. In your typical home owner occupied sale, the seller has a face, they are human, they can be reached by the listing agent and negotiations can occur. Try telling the bank I need to invest $20,000 to get this property habitable and you're only offering a 25% discount on this home (if you're lucky too)?

With an REO, the seller is a ghost at best, if you have a question about the property it's not going to get answered anytime soon, if at all. If you want to do an inspection on the house, don't believe the seller (the bank) will get the utilizes switched on, no the house is how you see it or "AS IS". The market has changed and the bank is happy to hold onto a property until it gets the price it wants even when the home gets broken into and the thieves steal the copper. Should you want to save a few bucks and choose to use the sellers title company you've given all control to another ghost entity. I've had a property that was meant to close 3months ago and is still in title work, each month they request a last minute extension needing to be signed by close of business else the deal will fall through. Then good luck for the buyer to try to claim back your earnest money, remember read that REO contract.

This has only frustrated my buyer as his contractors are kept waiting and waiting. BUT this is the price you pay for buying REO and handing control to save a few bucks. Majority of REO properties are bought in cash because no bank will not finance a property they deem as inhabitable and unsafe....which is majority of REO. Mind the fact that you also need to $10-25,000 to make repairs to make the home habitable and safe to live in. Who has access to $50,000 in cash to buy a home? I strongly advise IF YOU DO to contact me and we can talk smarter investment opportunities. 

Buying a home owner occupied someone is living in it, it has electricity, gas and water all turned on or can be requested to be switched on. They are more open to listening to feedback on the home prior and after inspection. They are motivated to sell else there would be no reason to have your property listed, best of all you can get financing from the bank to by this home. No need to come out $20-30,000 in cash to buy a property and then an additional $20,000 for repairs. You only 3-5% of the purchase price for an owner occupant or 25% for any investor to purchase using conventional financing. What a win compare to the large cash purchase of an REO!

I am open with my clients, should you think that buying REO is as much fun as you've seen on TV think again. Who knows what problems you will run into once you start switching on utilities.  If you are an experienced builder or investor and have several rehabs under your belt this is a viable investment opportunity but if you have never swung a hammer then a cheap property is going to end up being the most costly investment you'll make.