I always seem to know when the latest real estate guru runs a late night infomercial in the Los Angeles market.  How you ask?  An overwhelming number of phone calls the next day from new investors with the same script asking me to send them “deals” and telling me they have a system to buy and flip REO properties.  As a real estate professional who has sold REO assets since 1992, I can confirm that it is possible to make money and find good investments in the REO market, but not every REO is a good deal.

So what are the 10 things everyone should know about Foreclosures?

  1. REO does not necessarily mean cheap.  Anyone with kids understands how crazy it is finding the hottest Christmas / Holiday toy that your child simply must have.  If you’re a planner, you can easily find the toy before the “after Thanksgiving rush”.  Once black Friday hits, the word is out and hungry parents shop in force buying up supply.  Store after store sell out and you may find yourself making a few trips to find your prize.  By late December everything is picked over; to get that same toy you must check Ebay or craigslist, pleading with an early shopper to sell you their wares at double the price.  Well, it’s black Friday in the REO markets.  Everyone is shopping for the same deals.  What that means is not every REO property is a steal and because of the increased demand for the hot toy, (REO’s) they aren’t always cheap compared to other properties on the market.
  2. Buyer beware.  REO properties are owned by absentee sellers who most often have never seen the property.  They all employ agents to be their eyes and ears and rely upon their ability to be the triage surgeon, getting the patient in good enough shape to sell.  My point here is that there is a difference between the banks obligation to their investors and the long term ownership objectives of an investor who buys REO property.  I cannot stress enough how important it is to have professionals thoroughly investigate the physical condition of the property you buy.
  3. Have a plan, don’t window shop.  The words I hear most often from asset managers are “certainty of a deal”.  What this means for potential buyers is that banks want to know they have a real buyer that will perform on the contract they’ve signed.  A quick close and short due diligence period from a pre-qualified buyer will often trump the higher priced offer from a less organized buyer.
  4. Lowball offers are filed in the circular file.  Bank asset managers and the professionals who work with them are smart.  By the time a property gets to market they have a clear understanding of value and have an obligation to the bank to achieve a price within close proximity to the list price.  Although by definition an REO is a distressed asset, the bank does not need to nor would it be prudent for them to accept your 50% of value all cash offer.
  5. No, you can’t get paid as a broker if you are the buyer.  Everyone is encouraged to find representation with which they are comfortable.  If that means representing yourself, great!  However, banks will not pay you a commission if you are also the buyer.  Most banks require you to sign a disclosure that strictly prohibits earning a commission on a purchase where you are also the buyer.  Before you get cute, as agent you have a legal requirement to disclose to all parties if you are in any way related to the client you represent.
  6. Yes you can have your own buyer’s agent.  Some banks do not allow their listing brokers to represent buyers.  Many of the most successful REO agents simply make it a policy not to double end deals.  Therefore, that agent who has been driving you all over town for the past 3 months can earn a commission by submitting an offer on your behalf.
  7. Seller will choose the services.  In 17 years I can’t remember a time when a bank seller allowed a buyer to choose escrow or title services in a transaction from a vendor who was not already approved by the bank.  I’m sure your grandmother’s escrow company has been around for 50 years and has an impeccable track record.  If she’s not an approved vendor it “ain’t gonna happen.”
  8. “As-Is, Where-Is”.  Get very familiar with these words.  EVERY REO is sold As-Is.  No exceptions!  see #2 above.
  9. You probably can not buy it before they put it on the market.  If you are trying to buy a short sale you may find opportunities to strike a deal without the property being on the market.  However, once the property becomes REO and is put in the bank’s system they have an obligation to obtain the best price for the asset.  this most often means that it would be prudent for the bank to list the property and expose it to the market before they accept an offer.  If you wish to pay more than list price and can close quickly, providing “certainty of close” there may be an exception to be made.
  10. There are a ton of opportunities.  We are only beginning to scratch the surface of our current foreclosure situation/opportunity.  Foreclosure rates are at extraordinarily high levels and the expectation is that many more are coming.  If there is a silver lining to our current economic situation it is that some of the greatest wealth is built during the darkest of times.  Prepare yourself well and best of luck!

Allan Glass has been working in the foreclosure markets since 1992.  The ASG REO Team has completed over $1 Billion in real estate transaction and has sold REO property throughout California, both commercial and residential.