Investors are attracted to distressed homes because they offer great bargains and good values. Real estate investors are finding great investment opportunities right now in short sales, auction foreclosure homes and REO properties. Generally, investors are able to purchase distressed homes quicker because they have cash, and this makes their offers more attractive to distressed home sellers and banks that need or want to close quickly. Foreclosure sales can be complicated, and investors understand the process so they are more willing to stick with the transaction and close the deal. They are not scared away by having to make repairs, pay off liens or evict former owners or tenants when they purchase auction properties. They understand the foreclosure process and the laws in the state where they are purchasing property so they are less apt to make a costly mistake when they purchase a foreclosure home.
Short sales vs. REO’s vs. Auction Properties
Right now, distressed home opportunities are available in short sales, which are homes that are still owned by their current owners, REO bank owned properties or foreclosure auction properties. Sellers can stop a foreclosure by negotiating a short sale with their lender. They still lose their home, but they avoid a formal and expensive foreclosure proceeding. With a short sale, the lender is willing to allow the seller to sell the home for market value, which is less than the seller’s loan balance. The lender has to write off the difference between the loan balance and the sale proceeds. The short sale is a smart strategy for an investor because the investor gets to purchase the property at a discount. Many times the home is not yet listed with a local Realtor, so the investor is able to deal directly with the seller and the seller’s bank, having more control over the situation and the price and sale terms. Short sales take longer though to close because banks are slow in responding to the offers. Figure an average short sale takes at least six months to close. There is no guarantee that your offer will accepted though so you should negotiate an out clause if the transaction is taking too long, and you find another opportunity.
REO’s are bank owned properties that the bank buys back because the property did not sell at a foreclosure auction sale. The REO is listed with a local Realtor. If you want to purchase a REO, you must make an offer through either the listing agent or your buyer’s agent. The bank generally will respond within week or so. REO’s close quickly, usually within 30 to 45 days from acceptance. The good thing about REO’s vs. auction properties is there are no liens to be paid off, and you don’t have to evict any former owners or tenants at the property because the property is always delivered vacant. You can buy title insurance for REO properties as well.
REO’s are always sold at discounted prices, some need repairs and some are in move in condition.
Auction properties are foreclosed properties sold at foreclosure auctions. There are more risks associated with auction properties because you may not always get to inspect the property, you cannot obtain title insurance, you are responsible for paying off any property liens, and you have to evict any former owner or renter at the property. Prices are generally cheaper than short sales and REO’s so many investors are attracted to auction properties feeling they can afford to take a bit more risk because they are purchasing a property at a deep discount. If you are handy, you can rehab the home yourself. To get the most out of your investment, you should purchase properties the only need minor repairs such as cosmetic repairs and stay away from purchasing properties that are in need of major repairs or have structural damage because those types of repairs are expensive and cut into your profit margins.
As with any home purchase, you need to check home prices before you make an offer, do your due diligence and have your inspection done, if possible, so you know what type of condition the home is in. Investing in distressed properties is lucrative and profitable because there is a large selection of homes, interest rates are low, if you need financing, and prices are so affordable.