| Foreclosure, REO, short sale - these terms can be | | | | changed hands. All liens against the property have |
| confusing if you are a first-time real estate investor. | | | | been addressed. Back taxes have been paid. And the |
| But knowing the difference is important if you are | | | | title is clear. In many cases, the bank has even done |
| going to sink your hard-earned money into investing. | | | | any necessary repairs already. But as a result, they |
| Let's look at the differences. | | | | may expect full retail value. It depends upon the |
| In a foreclosure, the property owner has defaulted on | | | | amount of money the bank has tied up in the property, |
| the loan secured by the property, and the bank is | | | | but it's safe to say that the property wouldn't be an |
| exercising legal measures to take it back. Foreclosure | | | | REO if it had substantial equity. |
| properties are offered at auction, where the lending | | | | So, when do you buy these properties? Buy a |
| institution hopes to recover all or most of their losses. | | | | foreclosure when your research indicates that its |
| Depending on the condition of the property and the | | | | market value exceeds the loan balance plus repair |
| financial position of the bank, such properties may be | | | | costs plus any outstanding obligations. Timing can play |
| priced significantly lower than their market value. | | | | a role here, if you're aware of a particularly likely buyer. |
| REO stands for "Real Estate Owned," although it's | | | | But mostly, this just boils down to digging in and doing |
| more common to hear such properties referred to as | | | | some extensive research. Having a good network |
| bank-owned. An REO property has been foreclosed | | | | pays off here, because you can get information much |
| by the lending institution, and has reverted to their | | | | more quickly. |
| ownership. This is not how the bank wants | | | | Buy an REO when the bank finally relents and lowers |
| foreclosures to end. In most cases, the market value | | | | the price. And don't just wait for this to happen. Make |
| of the home simply does not cover the loan balance, | | | | your own luck. Find the right buyer, know when the |
| repair costs, and other fees associated with | | | | lender is going to lose patience, and show up with the |
| foreclosure and sale. There's little or no equity in the | | | | right offer at the right time. The margin can be low in |
| property. Banks are slow to accept losses, so they | | | | REO's, but the risks are also low. And they take less |
| keep such properties on the market at higher prices, in | | | | of your time, if you just keep your ear to the ground |
| hopes of a sale. | | | | for the right combination of events to converge. Again, |
| Should you, as an investor, buy either of these types | | | | a good network is a big plus. |
| of properties? Yes! But you must consider several | | | | The hidden gem in this arena, however, may be the |
| factors: | | | | pre-foreclosure. Working with a desperate |
| - Foreclosures often have very tempting price tags, | | | | homeowner and a bank that would love to avoid |
| but there's a good reason for it. Most importantly, the | | | | foreclosure costs can be a very good situation for the |
| title is not clear. In other words, ownership of the | | | | investor who walks in with cash at the right time. The |
| property is not clearly established. The previous owner | | | | dangers of foreclosure properties still apply, but the |
| may have some rights. Other lenders may even have | | | | margins are often enough to justify significant risk. |
| a stake. And then there's the issue of back taxes. | | | | Keep an eye out for these situations, especially now, |
| These properties can have prior obligations to state, | | | | but know what you're getting into with each property. |
| county and city governments totaling thousands of | | | | Work your network for essential market information |
| dollars. The next buyer could be walking into those | | | | and buyer leads, and keep your wits about you at all |
| obligations. Only thorough research will answer these | | | | times. There's a lot of money to be made in distressed |
| questions. | | | | properties, but getting a share of it requires hard work, |
| - REO properties, on the other hand, have properly | | | | market savvy, and sometimes a bit of luck. |