Warning: We cannot print today’s pieces without a frank discussion of the “f” word. Yes, the “f” word.
Foreclosure. It’s a fate we all hope to avoid personally. But as real estate investors, we also know that foreclosed homes may offer us tremendous opportunities for profit, incredible deals, and epic upselling after appreciation works its magic.
Acquiring properties that have been foreclosed, are owned by banks, or are otherwise underpriced because of related issues is a smart investing strategy for many REIs. If you’re thinking about going this route, you can’t afford not to know the following information about why and how to buy these discounted properties. Read on to learn more about REO investments, foreclosure, and how to make these assets into your next profitable investment properties.
An “REO” is a term for a bank-owned property. “REO” just stands for “Real Estate Owned”--meaning someone already owns the property. In the case of REO properties, that someone is always a lender. These lenders are, more often than not, banks. So all “REO investment” really means is just that the property is purchased straight from a lender, not a person.
Another thing to understand is that these aren’t “short sale” homes. “Short sales” are usually where investors can find major steals. In these sales, a homeowner is selling their home for less than they currently owe on the mortgage. Foreclosed homes have essentially been sold in this fashion back to a bank.
At that point, most banks mark the price way up--back to what the asset’s original value was, most of the time. After all, even banks want to make their money back. By the time the foreclosure is complete, the bank becomes the owner and seller. They can make any demand they like. Smaller banks may offer great deals on their homes.
The foreclosure auction can be the deal-hunting real estate investor’s best friend in this department. This is just one of your options for shopping around, but first, let’s get into why you might want to:
This is just the shor tlist of some of our favorite perks of these properties. Of course, you may reap additional benefits we can’t list because they honestly warrant an entire article of their own. But these are some of the very basic reasons why people love hunting for REO or foreclosed homes. They can be a dealmaker’s delight.
If the auction isn’t your scene, of course you can also buy a foreclosed-upon home directly. You’ll generally follow the same basic steps, but of course, check with your own real estate attorney before you purchase any major assets. That said, this is the basic outline of what you have to do to legally and safely acquire one of these properties:
Buying a foreclosed or bank-owned property is no different than making any other investment from an asset protection standpoint. Ensure you handle this property exactly as you would any other REI asset from a legal standpoint. If you normally buy with your Traditional LLC, do that. If you secured financing in your own name and have a land trust ready to go, proceed with your plan. If you don’t have an asset protection plan at all, it’s time to start learning about asset protection at the very least. Ideally, real estate investors should have a trustworthy attorney who can answer asset protection questions.
Of course, asset protection experts and firms exist for a reason as well. You’ve got options for protecting your new asset, so get a plan that’s customized to maximize your business’s profits, tax savings, scalability, and success. You can find an expert on any budget to help you out, but above all, don’t hold any real estate assets in your own name over the long term. You’ve got so many alternatives that there’s no excuse, so start planning before you even think about buying.
If you take nothing else away from this article, simply understand that making deals with the bank is a bit different than making deals with a person. This basic truth is the root of most of the confusion around foreclosed and REO properties. But since you’re no longer confused, you can start considering whether such investments have a place in your portfolio. Your answer will likely depend on many factors, including your age, sex, location, main career, investment class preferences, investment strategies, aspirations for your portfolio, and other highly personal details.
But for now, at least you know the basics of how to intelligently vet and purchase these properties. Your team of advisors and even your personal investing network is likely full of insight on the foreclosure opportunities in their respective local markets. Asking around can often be the beginning of a beautiful learning experience. So don’t be afraid to ask around about how foreclosure and REO deals have gone for others in your personal and professional network.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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