078: How to Buy REOs, Short Sales, and HUD Homes

On this episode of the InvestFourMore Real Estate Podcast, I discuss how to buy distressed houses. The market may be hot in many areas of the country, but there are still great deals out there. If  you can learn how to buy REOs (bank foreclosures), short sales, and HUD homes it will give you a competitive advantage. I have been a listing broker for REOs and HUD homes since 2008 so I know a fair bit about how to get good deals with them. There are many different strategies for how to make offers, when to make offers, and when investors can buy these homes.

What are REO properties and how can you buy them?

REO stands for real estate owned and is the term most banks use for their foreclosures. When a borrower gets behind on their payments, the bank can take possession of the home by foreclosing on it. Once the bank completes the foreclosure process the, bank owns the house. Before the bank can take possession most states have a foreclosure sale that is conducted by the sheriff, the trustee, or a court. The general public can buy homes at these sales, but it is very risky.

Once the bank takes possession of a foreclosure, they call it a REO. They assign an REO real estate agent to list and sell the property for them. Many investors ask me how to buy REOs before they are listed so that they can get a better deal. Unfortunately, 95 percent of banks will not sell their REOs before they are listed except in giant pools. Some banks and HUD will sell thousands of homes at once to large hedge funds or institutional buyers in pools of properties. If you are not buying hundreds or thousands of properties at once, you have to wait for REOs to be listed in order to buy them.

Once a REO is listed, many of the banks have put in place rules for who can buy them and when. Many banks like Wells Fargo, have owner occupant only periods. That means only people who are going to live in the home can make an offer in that period, which may be the first 10 days of the listing. Once that period is over, investors can bid on the homes. Once investors can bid, I would submit an offer as soon as you can. In some cases the listing agent will let you submit an offer during the owner occupant period and they will submit it as soon as that period is over.

Another misconception I see a lot is that banks just want to get rid of their properties, and will take pennies on the dollar. Banks want to make money just like any of us, and they want to get as much money as they can for their properties. That is one reason they do not sell their homes before they are marketed by an agent. The discount you can get on bank owned REOs varies greatly. When homes are just listed, you may be able to get a 5 or 10 percent discount, but do not expect much more. If a REO property has been on the market for 60 days or longer, you might be able to get much steeper discounts.

How can investors buy short sales?

Short sales are similar to REOs, but they have not gone through foreclosure yet. A short sale happens when the borrower falls behind on payments, but instead of the home going through foreclosure, the bank agrees to let the owner sell the home for less than what they owe the bank. If the bank is owed $100,000, the owner could sell the home for $80,000 and after selling costs, the bank would receive $70,000. Since the bank is agreeing to take less money than they are owed, they have a say in how the home is sold.

The bank cannot force the owner to complete a short sale or even tell them what real estate agent they have to use, but they bank does have a say in the transaction. The bank will have the seller and buyer sign a short sale addendum that states the terms of the sale. Usually the following apply:

• The buyer and seller cannot be related
• The seller may not rent the home back after the sale
• The home must be marketed on the MLS
• The seller cannot receive any kickback from the buyer that is not disclosed
• The contract cannot be assigned before the sale
• Some banks do not let the buyer sell the home for a certain amount of time after they buy it (60 or 90 days)

If the buyer and seller violate any of these terms, it could be considered short sale fraud.

The nice thing about short sales is there is no owner occupant only period and many times you can get an offer submitted right away. Some of my best deals have been on short sales where I was the first person to submit an offer. Once the seller accepts your offer, the bank must approve the price. It can take months to get the short sale approved and there is no guarantee the bank will accept the price.

How to get a great deal on a HUD home?

HUD homes are foreclosures that had FHA loans on them. FHA loans are insured by the government and when the properties go through foreclosure, the properties sometimes end up with HUD. HUD homes are sold on Hudhomestore.com, but a licensed real estate agent must submit the bids. HUD has owner occupant periods and they hold all bids in the beginning of a listing for a certain amount of time before they review them. HUD can have some awesome deals, especially on aged listings.

There are some tricks that investors can use to get a great deal on HUD homes:

• Look for homes that have been actively listed for more than 60 days. Sometimes HUD will take low offers on these homes.
• Submit your bids the first day investors can bid. Once the bidding period is open for investors, HUD looks at bids every day.
• Watch for price changes and submit bids as soon as the price is lowered.
• Always have your real estate agent mark: hold as backup, on your offer. If another offer cancels, HUD may accept your bid.

I still buy most of my deals from the MLS, even though there are not many distressed properties in my market. Even with the low inventory of distressed properties I have bought REOs, and short sales recently. I cannot buy HUD homes because I am prohibited as a HUD listing agent. If you know how the different listings work, have a great real estate agent or are a real estate agent, you can get some awesome deals.