Investing in real estate can be very profitable, with a growing number of foreclosures and REO properties available for sale. Each of these two ways to invest in real estate has risks and advantages. In a nutshell, foreclosure is the process by which a lender attempts to take legal possession of a property on which the homeowner has failed to make payments. If that property isn't sold in an ensuing auction, the title to the home is transferred to the lender. Then the home is known as a real estate owned, or REO, property. Knowing how each process works is crucial for an investor.
What Is a Foreclosure?
Foreclosure is the procedure by which a lender tries to take legal possession of a property. A lender usually begins the foreclosure process when the homeowner fails to make mortgage payments for three consecutive months. The procedure varies from state to state, and each state has a specific foreclosure timeline that a lender must follow in filing required documents with the court. At the conclusion of a foreclosure, a judge will authorize the sale of the property. The final step is the auctioning of the property at a trustee sale. The lender sets the minimum price that it will accept from bidders. If investors' bids match or exceed the minimum set by the lender, the property is sold and the title to the property goes to the winning bidder. If the property isn't sold at auction, however, it becomes an REO property.
What Is an REO?
A home becomes an REO, or real estate owned, property if no one purchases the property at a trustee sale. The property is then owned by the bank. A foreclosure home that has become a bank-owned property can then be listed for marketing and sale by a real estate agent hired by the bank. Most lenders have a department that handles REO properties. To sell the home as quickly as possible, the lender will remove any liens on title and resolve any other issues that might interfere with the sale of the property.
A lender that succeeds in foreclosing on a property takes possession of the home but does not own the property at that time. REO properties, on the other hand, are owned by the lender that foreclosed on the property. Foreclosures are sold by a trustee to the highest bidder at an auction, not by real estate agents. By contrast, the lender in an REO case must authorize a real estate agent to sell the property. The responsibilities of the buyer also differ in each case. In a foreclosure, the home is sold as is and without a title warranty. The buyer may be liable for paying off any liens or encumbrances attached to the title, since the lender assumes no liability for any liens. For an REO, the lender must clear all liens and encumbrances from the title. Finally, a foreclosure cannot be financed with a mortgage, but must be paid for in full, with a cashier's check, at the time of the auction. The buyer of an REO property, however, can pay cash or finance the deal with a mortgage.
Buying a property at a trustee auction or purchasing an REO can be a profitable way to obtain real estate. However, each method has associated risks. Obtaining a clear title to the property is important. A foreclosed property might have liens that must be paid by the buyer, or the property might require costly repairs after the purchase. An REO property will have a clear title, but it, too, might need extensive repairs. A thorough understanding of the entire process is recommended before setting out to buy real estate using either method.
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