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Bank Owned Properties Offer Terrific Investment Opportunities
By Eric Woolhiser
Making an investment in a pre-foreclosure property is a viable and
intelligent way to enter the market. Owners in this situation are
typically eager to make a deal, and if you can be in the right place at
the right time with the right offer, there's an opportunity to create a
win-win for all concerned.
What many investors don't realize however, is that there are often
equally attractive opportunities among listed properties - provided you
know where to look.
As you look through the MLS listings you may see some properties
described in a curious way. Alongside the usual descriptive information
is the phrase "sold as-is, as placed and with all defects" (or "as-is,
where is" ). That's code for REO (Real Estate Owned) - a property taken
back by the bank after failing to sell at auction. As foreclosure rates
increase, we'll see more and more of these popping up, because there will
simply be too much inventory for investors to swallow.
Bank owned properties listed on MLS - particularly those that require
extensive rehab - represent terrific opportunities for investors.
* Next 37 17 investors only!
First, because the bank that owns the property is likely operating out of
state. Often, the bank will have a deal with a major broker franchise
that will then trickle the lead of the REO down to the local agent. The
agent has a time limit on the listing contract and, particularly if there
is rehab involved, wants to sell the property as quickly as possible.
Second, since "gut-to-studs" rehabs are unlikely to be owner occupied,
these are less marketable in general. Unless the listing agent works
with a lot of investors, he's likely to sell it to the first investor who
steps forward. In addition, gut-to-studs properties are already free of
tenants.
When investing in an REO, keep these few simple guidelines in mind:
- Invest in improvements. Give yourself a couple of hours to look over
the property with your builder (if you are using one) and your realtor.
Look for opportunities like turning a half bath into a full bath,
splitting a bedroom or moving laundry hookups to more modern locations
like the top floor. If it's gut-to-studs, be creative... here's an
opportunity to remove functional obsolescence, which will improve your
chances with the appraisal when you retail it.
- Ignore the list price when making your offer. Remember that as an
investor, your job is to make a profit, and the price that you're
ultimately willing to pay is a function of making the numbers work. Do
the math: Get written and detailed estimates for any work that needs
doing, add the profit you need, drop in your carrying costs, and develop
a reasonable expectation of what it will retail for. Based on that calm,
objective look at your profit needs - and only based on that - come up
with your offer price.
- Be prepared to work with the list agent. Upon receiving your (fact
based) offer, the list agent may howl, curse and tell you there is no way
the bank would even respond to your proposal. Hang in there. As I like
to tell agents, "my job is just to put my buyer one dollar ahead of the
market." Show comps, make the case that the property is not suited for
an owner occupied buyer and express your confidence based on the research
you've done. It may take some phone tag and the deal may die, but just as
easily, you may get a call from the list agent in a month, once he
realizes that you have the best offer on the market.
The fact is, once you get past the initial posturing and chest beating,
the list agent may be your best advocate. He's the local eyes and ears,
and will work to show the bank the value of your offer. Together with
your agent, he can bring you to the finish line.
In summary, there are plenty of good deals to be made with listed
properties. If you do your homework, make intelligent improvements and
find an agent with an entrepreneurial mindset, REOs can be beautiful
investments.
Eric Woolhiser is a REALTORŪ with EXIT Advantage Realty in Westford
Massachusetts. His primary concentrations are negotiating short sales
and helping investors purchase multifamily commercial properties in the
Worcester area. He can be reached at eric@woolhiser.com.
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