REO, or banked owned, properties can present extremely opportunistic buying options for almost any type of real estate purchaser.  From the first time home buyer, to investors and even buyers looking for a 2^nd home in the beautiful White Mountains of Arizona, these properties can afford the purchaser an opportunity to buy a property in a market they may not have otherwise been able to afford.

Regardless of the type of buyer you may be, certain steps must be undertaken prior to finalizing an agreement to purchase.  The due diligence of the buyer will insure that an agreement to purchase will not come back to haunt the buyer.

The Arizona Association of Realtors® standard Residential Resale Purchase Contract states the following: “During the Inspection Period, Buyer, at Buyer’s expense, shall (i) conduct all desired physical, environmental, and other types of inspections and investigations to determine the value and condition of the Premises; (ii) make inquiries and consult government agencies, lenders, insurance agents, architects, and other appropriate persons and entities concerning the suitability of the Premises and the surrounding area; (iii) investigate applicable building, zoning, fire, health, and safety codes to determine any potential hazards, violations or defects in the Premises; and (iv) verify any material multiple listing service information.  If the presence of sex offenders in the vicinity or the occurrence of a disease, natural death, suicide, homicide or other crime on or in the vicinity is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period.”

The amount of rehabilitation required on REO properties runs the gauntlet from almost none to beyond the scope and resources of almost any buyer.  The rehabilitation required should be one of the major determinants of whether a particular property will fit the needs and wants of a particular buyer.

Let’s take a look at how each class of home buyer could benefit from purchasing an REO property.

First Time Home Buyer:

The biggest advantage here is that a potential buyer may now be able to purchase a primary residence in a market where pricing has precluded them from doing so in the past.  Many REO homes will be listed at 20-30-40% below existing housing prices.

The amount of rehabilitation required is going to be an extremely large factor in the purchasing decision.  There are two options available to the buyer which can overcome this potential hurdle.

First, if the buyer is somewhat proficient at construction type tasks, by performing the necessary work themselves, the home owner has created a tremendous equitable position in the property through “sweat-equity”.

Secondly, there is an FHA loan program available which will finance the purchase of the property and will also include, in the total mortgage, an amount to complete certain qualifying repairs, upgrades, and improvements to the property.  The buyer may not gain the advantages of equity as described above, but they may be able to own a home where they couldn’t otherwise.

Investors:

The idea of a real estate investment is just like any other investment vehicle:  Buy Low, Sell High!  The opportunities for knowledgeable investors in the REO market are only limited by the number of properties available and the amount of long term risk the investor is willing to assume.

The real estate investor will probably view an REO property with one of two potential reasons for purchasing.

Purchasing the home now and holding it as a rental or income property.  The investor is betting that by buying now at a lower price and having a tenant cover their carrying costs, they will be able to realize a substantial gain on their investment by selling the home in the future when market conditions have turned around.

By buying now, rehabilitating the property to a marketable condition and then selling it, the investor could still realize a profit over and above his purchase, rehabilitation, and selling costs (commonly known as “flipping”).

Either way, the REO market is an active and attractive avenue for real estate investors.

2^nd Home Buyers:

 As with the first time home buyer, someone desirous of a second home in a market they may not otherwise be able to afford, could possibly fulfill their wants with an REO property.  The financing options may not be as attractive; however a second home purchaser is probably in a much different financial situation than the first time home buyer.

Purchasing a property now, at a significant discount to comparable properties, will allow the second home buyer to rehabilitate the property immediately with funds available or they may wish to protract the process and do the rehabilitation themselves at their leisure or as finances dictate.  Either way, a purchaser has the opportunity to afford a property now instead of maybe years down the road when prices could be even higher.

Most of these scenarios sound promising and potentially profitable.  That may be the case.  However, there are inherent risks with any major purchase and those risks should not be weighed lightly.  But, with proper due diligence, a clear understanding of what the purchaser wishes to accomplish, and the assistance of qualified professionals, anyone could benefit from the opportunities available in the REO (foreclosure) market.