In the aftermath of the economic recession, many people found themselves in foreclosure, and banks are now trying to sell off their homes. Bank-owned properties (REOs) are one of the fastest-growing real estate market categories in America. With this increasing popularity comes a great deal of misinformation about REOs.

How Banks Treat Bank-Owned Properties

Banks have been buying foreclosed homes to rent or sell as investment properties in urban neighborhoods for more than a decade. Many of these homes are not suitable to live in, but banks offer them for sale at market prices, sometimes for well below market value. This is not the case with all bank-owned properties, and not all banks sell these properties for less than the market—however, many do. Banks that choose not to sell their REOs often use them as collateral for loans—a process called “self-liquidating” loans.

Bank-owned properties are subject to a slightly different set of rules than other real estate. Some banks use REOs only for rehabilitating the home, and if that’s what they would like to do with your house, you might not end up with an REO. However, many banks are eager to off-load these properties for a quick profit once the economy recovers. As a result, there is no reason to believe that bank-owned homes will be the same as any other R-E-O in performance.

Is there any difference between REOs and a bank-owned home?

There are a lot of banks out there, and they have different practices, so you cannot just look at one bank or think they’re trying to screw you. You should always shop around for a good deal on an REO. Most banks will price their properties in such a way that you’ll be able to get the highest price possible. However, this will not always be the case; sometimes REOs will go cheaper than the market price. Just use your own intuition; go with your gut.

What are the factors that determine the value of a bank-owned home?

Every single bank is different and, therefore, every single bank-owned home is different from its potential peers, but there are some general guidelines you should look out for:

1. A low price. Banks want to get rid of these properties as quickly as possible; if they’re willing to sell at a discount, they don’t want them in their properties. Banks purchase REOs as a way to make money, and if they’re going to lose some of that money, they will simply hold onto the property indefinitely. However, if you’re willing to pay more than they want, you’ll be able to get your hands on that property before anyone else.

2. You won’t have a problem with the condition of the home. Buyer beware: not all banks are honest about what condition their homes are in, so never assume everything is in perfect order! You should thoroughly investigate any REO you plan on buying—even from a supposedly reputable bank—and make sure it isn’t going to fall apart after the purchase. You should have a professional inspector check it out before you buy.

3. Smaller mortgage than average. With the exception of the self-liquidating loans, most banks will be willing to sell their REOs for less than the market value if you’re able to secure a loan that is smaller than other surrounding properties in the neighborhood. The bank would rather sell at a discount and make some money than hold onto it and take a loss.

What are the extra costs of investing in bank-owned properties?

In addition to purchasing your bank-owned home with cash, there are usually some additional fees associated with these properties:

1. Loan cost. If you’re going to secure financing for your REO, be prepared to pay a little extra. These loans carry higher interest rates than a traditional loan, and will usually require stricter terms than a traditional loan as well.

2. Realtor fees. Most banks will require that you go through a realtor so that they can get the best deal for their properties, but they don’t always help with the costs associated with listing and selling properties through them. Usually, it’s the buyer who ends up paying fees, but it can vary depending on your region and situation.

3. Repairs. Banks aren’t always truthful about what kind of condition their properties are in, so be prepared to pay for repairs in addition to the purchase price! This is especially true if you’re looking for a quick flip but also applies to anyone with an REO.

Is it good to invest in REOs?

Investing in bank-owned homes can be tricky. Before you buy, make sure your research is thorough and that you’re ready to take on any additional costs the home may incur. Even if banks are willing to off-load their REOs for a lower price than the market price, they might not be willing to sell at such a low price if it means losing money. To get the best deal out of these properties, do your due diligence and shop around for a bona fide deal!

Conclusion

Your goal as a real estate investor should be two-fold: find a deal that offers the highest return on investment and protects your own financial interests. Buying bank-owned homes aren’t inherently bad; it can actually be fantastic for your portfolio, as long as you know what you’re doing. However, it is important to be clear on what you’re buying and how you can protect yourself.

For more information, you can visit Real Estate Calculators.