The foreclosure process presents numerous opportunities for investors to acquire real estate at significant discounts. From the no cash, no credit deals touted on late night TV, to billion dollar bulk purchases. These opportunities can be grouped by the 3 basic stages of foreclosure:
Properties that are in foreclosure but have not yet been foreclosed upon, represent an opportunity to work directly with the property owner. At this stage, more is owed on the many properties than they are now worth. These underwater, or short sale properties, can still represent an opportunity; by working with the bank, as well as the owner, to secure a discount from the amount owed. This can be a win-win solution, by allowing the bank to avoid having to foreclose, allowing the owner to move on without a foreclosure on their record, and a great deal for the patient investor. Not all preforeclosures are short sales, and those with equity present an even greater opportunity.
Buying at the foreclosure auctions is one of the riskiest, and most rewarding, foreclosure opportunities. Buying at auction typically requires foregoing inspections, title insurance, and financing; and may even require you to evict the prior owner or tenant. But these hurdles lower competition, and therefore present far better discounts to those that can overcome them.
Bank Owned and REO
Banks are taking back thousands of homes through the foreclosure process every month. These homes will be listed for sale, or occasionally sold in bulk. These properties are often not fixed up after foreclosure, and therefore can represent a bargain for investors willing to buy diamonds in the rough. There are also times when banks need to quickly dump properties, to raise cash to meet reserve requirements. Further, banks often use out of the area real estate agents that might not realize the value of the property, and mis-price it. For these reasons and more, REO properties provide significant opportunities for savvy investors.
|Opportunity||Traditional Financing||Subject-To Financing||Title Insurance||Inspections||Eviction Required||Overall Risk|
|Bank Owned||Yes||No||Yes||Yes||No||Very Low|
Foreclosures present a number of listing and sale opportunities for Realtors®®, as well as being a source of information that helps differentiate them from competitors in their market.
A short sale is a property that is being sold for less than the amount owed to the lender. Many foreclosures are in this position, and it is often in the best interest of all parties to attempt to sell the property as a short sale, prior to completion of the foreclosure. This presents opportunities for Realtors®® to both list and sell these properties. Short sales are typically more difficult than traditional sales, as they require both homeowner’s approval and the lender’s approval. This is further complicated by the fact that some lenders are difficult to work with, or have unrealistic expectations around price, commissions, or other purchase terms. Still, short sales represent an important alternative to foreclosure, and for those Realtors®® that learn how to identify which short sales are likely to close, it is a lucrative opportunity.
REO stands for Real Estate Owned, and is another term for bank owned properties. The current foreclosure crisis has resulted in banks taking back tens of thousands of properties each month through foreclosure. These properties all must be resold, and are therefore typically listed with a Realtor®®, which the banks refer to as REO Brokers. Note that, despite the name, a Realtor®® does not have to personally have a brokers license in order to represent a bank; though they do, of course, still have to be licensed under a broker, as with any other real estate transaction. Representing banks is different than working with traditional sellers, as the bank often requires that the REO Broker handle basic property management, do property evaluations known as BPO’s, and even advance money for repairs or utilities on the lenders behalf.
Buyers want bargains. Buyers believe foreclosures are bargains. By becoming a foreclosure expert, and marketing that expertise, you will attract those buyers. This does not necessarily mean you have to sell them a foreclosure. Most buyers will come to the conclusion that they’d rather have a clean, listed, easy transaction—and they’ll feel much better about that conclusion if they know they have worked with a Realtor®® that is knowledgeable about the entire market, including foreclosures.
Foreclosure information can be used to help get non-foreclosure deals done as well. Specifically, foreclosure comps can help:
- Get sellers priced to sell
Knowledge of properties not yet listed in the MLS is as vital to successful pricing strategies, as lists of recently sold and pending sales. Foreclosure comps show you every possible REO listing that could compete with your seller in the next 6 to 9 months.
- Get buyers off the fence
Negative news about foreclosures keeps many buyers on the fence. Is it a good time to buy? Will I get a good deal? Should I wait for a foreclosure? Yet, the reality is that there are often very few upcoming foreclosures that meet your buyers criteria. Foreclosure comps can show them every foreclosure that may be listed as an REO for the next 6 to 9 months, giving them a crystal ball into the future that will remove all fear, uncertainty, and doubt.
- Get bank offers approved
Foreclosure comps can help you convince a lender that an offer on a short sale or REO is reasonable, and in their best interest. Pointing out to a lender the upcoming REOs (which are not yet listed), can sway an asset manager’s consideration of an offer.