Sales of distressed properties dominate the current real estate market. In some areas, short sales, repossessions, and other distressed properties comprise over half of all real estate transactions. Although the housing market appears to be in the later stages of the worst conditions in its history, many investors are still making money in real estate. With so many real estate transactions involving short sales and REO sales, it is easy to see where they are procuring properties at less than market rate. According to many experts, this trend will continue through 2010 and well into 2011.
Neither method of investment is without risk. The risks however, can come from two entirely different components of the investment property formula. Someone who isn't already immersed in the industry may not truly understand what short sales and REOs are, as well as the benefits and risks associated with both.
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What are some of the advantages to an REO?
Like a short sale, one of the primary advantages to purchasing a REO is that they often sell for less than market value. By placing an offer on the right house on the right day, an investor can purchase property for as little as 60%-75% of market value. For the most part however, an REO sale is not going to yield the same spread as a short sale would. Also, a REO often requires a sizeable down payment, where as short sale often does not.
The key to an REO sale is acting quickly. With the number of houses going into foreclosure slowly dropping, investors are now competing for prime locations. When the bank issues a counter offer, don't sit on the fence. Either counter back immediately or move on. Otherwise, an investor runs the risk of being outbid on a property. This can lead to a bidding war between two to several bidders. Anyone who has ever watched a Barrett-Jackson exotic car auction has seen how quickly sales prices can rise on a rare automobile. This bidding war often leaves the winner very little spread to work with on a flip or resale. Set your personal limitation for each property and stick to it. Don't be afraid to walk away. With more than one investor bidding on a property, it is commonplace to have to bid on a number of properties before acquiring one.
Another advantage is the speed to close. The banks want to remove these properties from the books. So the time from an accepted offer to close is very fast. Although this can mean that an investor could have money tied up in a property for short period of time, this aspect of an REO sale can also be a disadvantage. In addition to a fast close, many banks will not allow for a due diligence period.
With no due diligence period and the bank not having to disclose important issues about a property, it is important the an investor, or even a couple looking through REO listings to purchase their first house, use the right real estate agent.
"The key to successful REO purchases is to work with an agent who knows what to look for when evaluating distressed properties. Issues such as a roof/hail damage, synthetic stucco, or poor siding could be very expensive repairs. Fortunately, with the right agent and inspector, houses with these and other issues can be avoided if the buyer works quickly", said Ransdell.
Both methods of property procurement can be extremely profitable, offering investors opportunities to score returns on their investment significantly higher than through most other traditional investments. However, just like traditional investing, these avenues aren't for everyone.
Both a REO and a short sale involve elements of risk. Each has its own unique risks that could in the end cost the investor more money than they anticipated. REOs offer a quick close, but the buyer can be left unaware of structural or cultural issues until it is too late. Through a short sale, the process often takes months to complete, but the investor knows what they are purchasing. With the right research and pairing up with the right agents, the reward can greatly outweigh the risk.