How to Buy Real Estate Owned Property
Jul 26, 2017
Purchasing REO property can be a great option for both commercial real estate investors and buyers. This process comes with a set of distinct advantages which can be very attractive, but naturally, there are some key differences to be aware of as compared to the traditional home buying process. Many first-timers to REO property are understandably a little unsure of what to expect.
Let’s start with a definition. REO commercial properties, or real estate owned commercial properties, have been foreclosed on by a lender, which has taken the title back after the property was unsold via auctions or other sales.
REO Properties: Advantages and Disadvantages
Searching for REO properties carries its fair share of benefits. For example, buying a bank-owned REO property generally gives the buyer the chance to purchase the home free of title liens (a caveat to this below), as lenders typically expunge them once it becomes REO. Additionally, the investor can save some effort as the foreclosure and eviction process has already taken place.
REO properties carry disadvantages you should be mindful about, as well. REO properties are generally sold as-is and usually require some TLC. After all, they’ve been foreclosed on – maintenance and repairs often fall to the wayside when a commercial property owner is struggling to make payments. On top of this, some banks in certain states can be exempt from providing transfer disclosure statements, which are another way of getting an idea of the condition of the property. With REOs, the disadvantages are clear: When you don’t know this history of a property, you may end up saddled with extra costs you didn’t plan for.
Buying REO: 4 Steps
Once you’ve consulted with your financial advisor and determined if you’d like to pursue investing in real estate owned properties, there are four key steps to take during the purchase process.
1. Title Search
Though banks typically expunge title liens, any property purchase runs the risk of unintentionally coming into conflict with liens or outstanding taxes, and REO properties are no exception. Liens are placed on the property for things like unpaid commercial loans or taxes, but they don’t disappear just because the property’s been foreclosed on, or because you aren’t the person who missed payments – they disappear once they’re paid. Some lenders clear certain liens, but you may still run into a lien you didn’t anticipate.
Ensure you’re in the clear by searching public records for outstanding taxes and liens. Title companies can run full, insured title searches prior to closing on the deal for extra protection. Most banks should make a practice of clearing the title prior to selling it, but do your due diligence – it’s better to be safe than sorry.
2. Inspect the Property
REO properties are sold as-is, and frequently require some rehab or repair. In all REO purchasing situations, you should get a clear layout of the property’s repair needs. If you’re not mindful, your savings on the purchase can be quickly eaten up by repair costs.
Hiring a licensed home inspector to perform an inspection and give you a written estimate of the repair costs is a good start. Coming prepared with all the information possible when you’re looking to purchase the REO property will not only help you feel confident with the property, but it will also help you better negotiate the price.
3. The Offer and Negotiation
Banks are often eager to get rid of their real estate owned properties. There are opportunities to improve the deal you’re getting on the REO property, from associated fees to the asking price. However, these opportunities aren’t going to fall into your lap – you’ll need to do some negotiating.
Come prepared. For example, you may be able to negotiate the price down if the bank knows the property has several thousand dollars in necessary repairs – explain the reduced price with documentation of the necessary repairs to back you up, including pictures and estimates. There are no guarantees, but you’ll find the potential savings to be worth the effort.
There are multiple routes you can take to secure REO loans. From commercial mortgages to home equity line of credits and hard money loans, there are many options out there to help you finance your REO commercial property purchase. For nearly every situation, there is a financing option suited for you.
Do your homework. Different avenues have different benefits, and whether you plan to use the property as a rental, repair it for resale, or utilize the space for your business will make the difference. You’ll be able to tell what’s best – as long as you’ve asked questions and done some research.
REO Commercial Properties and You
Your foray into REO commercial properties can be as successful and as fruitful as you make it, but it all comes down to understanding how they work. Hopefully this primer has offered you the basics, even though the next moves are up to you. Do your due diligence and discuss you’re your financial advisor whether REO commercial properties may fit into your personal financial situation. As always, Riverdale Financing is available to discuss your REO commercial loan situation and needs.