Pros and Cons of Investing in REO Properties

Real estate-owned properties – also known as REOs – are foreclosed properties that failed to be sold at auction. REOs can be a great investment for experienced investors and first-time homebuyers looking to secure a property for cheap. REOs are also very common for investors looking to renovate and rent out properties for a passive source of income.

No matter if you’re looking for a primary residence to fix and flip or to rent, here are the pros and cons of investing in REO properties:

Pros Of Investing In REOs

Pricing

Properties sold at foreclosure auctions are already sold at a discount. REO properties are those that failed to find a buyer in those auctions. For that reason, REO properties are sold at a heavy discount; banks want to get them off their books as quickly as possible. A vacant property will still incur HOA fees, various maintenance costs, and property taxes.

An REO property in a ‘good’ neighborhood can regain a substantial part of its value in a short amount of time. Investors looking to fix and flip a property often consider REO their preferred investment.

No Homeowners Involved

One of the biggest factors that can slow down a property sale is the lengthy eviction process of former owners or tenants, especially in judicial states, where every step of the eviction process has to go through the court system. This process can drag on for months – or even years.

However, this isn’t a problem for REO properties. REO properties are already vacant following the foreclosure and subsequent attempt to sell them at auction. That’s not to say it’s move-in ready – most foreclosures and REO properties aren’t – but at least they’re unoccupied, and you can start working on repairs immediately.

Free Of Outstanding Taxes And Liens

REO properties usually have no liens or encumbrances, as it’s in the banks’ best interest to facilitate any sale. You can still check for defects in the title of a property by hiring a professional or by checking public records for liens on the property.

Cons Of Investing In REOs

Heavy Competition

This is a tricky one. Demand for REO properties is always high because the price is always low compared to other properties in the area. You will compete with professional real estate investors, house flippers, and even first-time home buyers.

One upside is that if the property wasn’t sold at foreclosure, it may need extensive repairs. Some investors may not be interested or have the necessary funds.

Typically Sold “As Is”

REO properties are sold ‘as is,’ which means the bank isn’t legally required – or liable – to disclose the state of the property. That means you, as a buyer, must do your due diligence and ensure you know what you’re getting yourself into.

Financing is restricted

Finding financing for REO properties can be difficult; some banks are reluctant to finance ‘distressed’ properties that need significant repairs. Mortgages are still the most popular option to finance REOs, but if you’re having trouble, it may be worth looking into hard money loans and home equity loans.

FAQs

How To Find An REO In My State?

The best way to find REO properties is to look for soon-to-be foreclosed properties. Remember that all REO properties were at some point listed as foreclosure and failed to be sold at auctions. That’s why keeping track of online listing services, locally printed publications, or specialized foreclosure websites is a must if you want to invest in REO properties.

What Is The Number One Reason For Foreclosure?

In the US, the most common reasons for foreclosure are unexpected medical expenses. A close second is loss of job or employment, divorce, and increased home expenses. Some of these are unpredictable, but savvy investors know where to look when a divorce is imminent or when market conditions are shifting.