REO Properties, or Real Estate Owned properties, are properties owned by a large agencies or institutions, such as banks, HUD, or the VA. Banks acquire such properties through real estate auctions or Sheriff’s Sales. For example, Mrs. Whitley falls behind on her mortgage payments. As a result, the bank sends her a Notice of Default and begins foreclosure proceedings. When the property is actually foreclosed, it will then go to auction or a Sheriff’s Sale. If someone bids on the property at the Sheriff’s Sale and wins, that bidder is responsible for paying the bank that open mortgage. If there are no bidders — which can occur if the liens or open mortgages exceed the value of the property — the bank then takes over the property. As a result, it is now considered an REO or Real Estate Owned property.

Keep in mind that banks are not in the real estate business; they are in financing. Consequently, they do not want to hold onto these properties. They want to sell them as fast as possible. This spells ‘opportunity’ for the savvy real estate investor. This is not to say that banks give these properties away, but you can find some great deals. I purchase more than half my distressed properties through banks. But please understand, when looking for REO properties, you cannot go directly to the bank. While many individuals selling foreclosure programs state that you are to go directly to the bank to buy their REO properties, this is ill advised. All banks sell their properties through real estate agents or brokers (see the next section for an explanation of these characters). My advice, then, is to go directly to these agents. Prior to putting them on the market, these real estate agents normally evict any tenants dwelling therein, have an appraisal done to determine value and cost of repairs, and board up the property in an effort to prevent vandalism. When purchasing REO properties, they are sold “As-Is.” No warranties are made or implied. Therefore, it is crucial to perform a thorough inspection on these properties prior to making an offer.

When looking for REO properties be sure to visit a few REO real estate brokers. Do not deal with just one broker. Why? Because all banks use different brokers to handle their REO properties, there are a variety of REO brokers, and different brokers manage different types and numbers of listings. Some handle much larger REO property listings than others. As there is tremendous potential for you in this market, it is vital that you get to know as many REO brokers as possible, particularly the ‘big’ brokers. You’ll know how big a broker is by the size of his property list. While law requires brokers to place these properties on the Multiple Listing Service (MLS), which identifies all properties for sale in a given state, often the properties are already under contract by the time this occurs; in other words, they are already sold. So as you become friendly with REO brokers, letting them know who you are — that you are a genuine player, ready and able to close on any property within 30 days with ALL CASH — they will be much more likely to contact you with any fresh listings. By way of side note, there is never need for you to disclose to brokers how you generate cash for your deals. They never need to know that you use hard money lenders or private investors. It is none of their business.

When they ask if you have all cash, just say, “Yes”!

In all my years dealing with REO brokers, I have never let them know I use private investors, because if they hear that you use hard money lenders or private investors, they will likely conclude that you will be unable to close within 30 days. Remember, these brokers work on commission, so the faster you close, the faster they get paid; this means the faster you close, the more they will desire to do business with you in the future. By telling the brokers you are paying with all cash, you are actually being truthful, as you are paying cash. The only crucial matter is that you either need to have your financing set-up before you begin making offers on properties, or go under contract and assign contracts to other investors for a fee.

So now you’re probably wondering where to find these REO brokers. THE BEST PLACE TO FIND REO BROKERS WITHIN YOUR STATE IS ONLINE AT WWW.REONETWORK.COM. Once at that website, simply choose the state where you want to buy and sell properties, and a list appears specifying all brokers who deal with REO properties. From that point, give each of them a call and inform them that you are a real estate investor who buys properties for ALL CASH and would appreciate a list of their bank owned properties. Smaller brokers won’t have a list, whereas the larger ones usually do. Once you receive a current list, drive by each of the properties, inspecting both their exterior appearance and the neighborhood in which they are located. Before contacting a broker to conduct an interior inspection of a given property, be sure to determine whether the list price is within your range. If not, you could still submit a low ball offer, but it would likely be rejected.

Offers I make on properties are typically 85% of the list price. That is, if the property is listed for $100,000, I’ll make an offer of $85,000. While banks will usually not settle for less than 88% to 90% of the list price, other factors, such as how long the property has been on the market, can lower that figure below 88%.

Once again, when you receive your list of properties from the REO broker, review the list prices and drive by the properties. If a house looks bad on the outside, it will likely look bad on the inside. The drive-by, then, gives you a good idea as to whether the property is fairly priced. If it is fairly priced, I call the broker and arrange to see the interior of the property. If after a walk through of the property and working the numbers, it appears to be a good deal, submit an offer. Keep in mind that compared to preforeclosures, divorce, probate, abandoned, or other distressed property, in which you can put a mere $100 down to secure the property and make the contract legally binding, this is not so with REOs. Rather, REO offers must be accompanied by a $1,000 check. Why? The banks want you to put your money where your mouth is! They want to know if you’re serious. That’s understandable!

While coming up with that $1,000 deposit can be a hassle, on the whole, I find this market to be the best. Why? Once you become friendly with a few REO brokers and have proven you will close the property when you say you will, they WILL call you when they get a new listing. I presently purchase one to two properties per month from my REO brokers. They just call me and off I go to see the property. I have worked with these brokers so long and developed such a rapport with them — they now know what I look for in properties, particularly pricing — that I end-up purchasing about 99% of the properties I go see. This means I waste no time looking at dead properties. I only spend about one hour per month looking at the properties they refer me to. So if “time is money,” this is time well spent!

Other sources for REO properties are HUD and VA homes. HUD homes are those owned by Housing and Urban Development, a federal agency, and are sold through a bidding process. You can find listings of HUD homes at www.hud.org, and bid on those homes through HUD brokers, who can be found at the same website. Another worthwhile feature of the HUD website is that after signing up, they will send you new HUD listings by email. Offers placed on HUD homes must also be accompanied by a $1,000 check. These homes are classified as either owner-occupant listings or investor listings. As you are an investor, you can only bid on investor listings. Any questions as to the category of a particular listing should be directed to the HUD broker you work with. An important but little known fact is that HUD rarely accepts bids lower than 93% of the list price. So don’t waste your time making bids lower than that. VA homes are those owned by the Veterans Administration, another federal agency. They are sold in the same manner as HUD homes, through a bid process. The 93% of list price minimum bid also holds for these homes. The difference is, all listings can be bought by an investor. To acquire a listing of all VA homes, just logon to www.vahomes.org. Once again, subsequent to signing up, the VA will issue you a list of all their properties by email.

HUD and VA homes are a good source of properties. Though there is a lot of competition, you can find some good deals. I have purchased quite a few properties from both agencies.