Fixing and flipping property isn’t for the faint of heart. If you’re new to real estate investing, or the world of real estate altogether, it can seem like a lucrative way to make money. It is, but only for those who know what they’re doing. In fact, a RealtyTrac report found that:
- 12% of flips were sold for a loss or break-even amount
- 28% of flips brought their investors a return of less than 20% of the purchase price of the property
Another study found that fix and flippers’ profits are impacted by a smaller and smaller inventory of distressed property.
All of this points to one thing – the need to invest smartly. That’s what we’ve built our reputation on at Lionshare Lending, and it’s how we are able to help our clients achieve success. So, with smart and successful investments in mind, let’s talk about REOs.
What is an REO Property?
REO stands for real estate owned. These are properties that have been foreclosed on and have failed to generate the minimum bid required by the lender at a foreclosure auction. After the property fails to sell at auction, the lender takes possession and typically turns it over to a specialized REO real estate agent. These agents will try to sell the property, often times at a below market price.
This discount is what makes them so attractive as investment properties and can lead to more buyers competing for the property. If not careful during this process, the outcome can be potentially disastrous for inexperienced flippers.
More often than not, REOs require significant repairs, maintenance, and upkeep. For the rookie flipper, this presents an opportunity to purchase a property for a seemingly competitive price, with the very real downside being the unknown cost of rehab. This can lead to small profit margins, or even no profit at all. It can also lead to investors having their financing pulled as they take too long to complete their project.
Are REOs Risky Investments?
The REO seller often won’t know the specifics of their property’s condition. Banks, large-scale mortgage brokerages, and other lenders that own REOs simply don’t take the time to inspect every property. This can lead to purchasing a residential or commercial property that is in violation of local codes – or may even have serious unknown structural issues. Make sure to hire an inspector of your own to go over the property before purchasing it.
Then there is the issue discussed above – inexperienced investors biting off more than they can chew. This presents very real problems. Not only can investors underestimate the overall cost and time it takes to rehab the property, they may also purchase an REO property in a less than desirable area making it more difficult to resell.
It is important to stop here and point out that REO properties aren’t all risk. In fact, they’re nothing short of a lucrative investment for savvy flippers. With that in mind, let’s take a look at the benefits of purchasing REOs.
What are the Benefits of Purchasing REO Properties?
There are a number of reasons that REOs are attractive for real estate investors. The largest among these are explored below:
- Low cost – REOs are not typically in the best condition. This factor, coupled with the desire for most banks and lenders to get REOs off their books ASAP means that you can often purchase them for significantly less than market value. They may require a lot of work to repair, but the potential for substantial profits are achievable with the right properties.
- All liens are satisfied – Typically, you don’t have to worry about back taxes, HOA fees, mechanics liens, or any other encumbrances when you buy an REO property. Lenders usually satisfy these liens in an attempt to sell the property faster. However, it is imperative to have a thorough review of the title report done by your lawyer to ensure you are not saddled with unexpected issues after taking ownership.
- REOs are typically vacant – a home or property foreclosure and eviction is a lengthy legal process in most areas, which can significantly slow down your ability to repair and sell an investment property. REOs are typically already vacant, so you can start construction as soon as you close the deal.
Are You an Experienced Flipper in Need of Funding?
Finding the right lender is as important as finding the perfect property. This is true for REOs and all types of investment property. You need someone who will stand in your corner every step of the way. You need someone who treats you as more than a number on a spreadsheet.
We build long-term relationships with our clients here at Lionshare Lending. We’re not just investing in your project – we’re investing in you as an experienced real estate pro.
If you’re a veteran real estate investor who needs the quickest REO funding in the hard money industry, call us today at 855.505.LEND. We’ll get you the capital you need to finish your flip.