No Money Down on REO, Not Likely

Some of you might ask what is an REO? An REO is Real Estate Owned …by the bank. Banks are in the business of lending money by making mortgages on real estate. In times like these, sadly there are plenty of foreclosures. Banks do not want to own real estate so they usually hire a real estate broker to unload all of their foreclosed deals. There is more than one way to purchase deals from the bank and I would like to share two of those ways with you. The first method of purchasing an REO is the more typical way which is putting an offer in directly with the realtor that is handling the property. Unfortunately, the bank does not allow you to do all the creative stuff I’ve talked about in the past. I have never seen for example a bank allowing you to purchase the property with a built-in budget for repairs. The bank may consider paying the closing costs but that’s about it. So the question is, can you acquire property from the bank and take out equity? The answer is yes if you have a temporary source of cash. Here’s how. After you find the property you want to purchase, the next move is to get a mortgage approved for 75% of the market value (not your purchase price but the market value). Next, close with a short term loan from another bank or in the alternative, use your residence as collateral for a second mortgage. If you have a pre-approved mortgage, there is no way you should have a problem getting short term financing. Immediately after closing, refinance and pay off the short term financing putting the extra cash (if any) in your pocket. Remember, if the real estate is a single house that you plan to rent out, do not finance it for more than 75% of the fair market value. Why? Because you could easily arrive at a negative cash flow with too much debt. Also, you never know what the new property tax bill will be. Often when lenders foreclose a house they will buy the property at the foreclosure sale for the full value on the mortgage. The problem with doing this is that it can cause the property taxes to adjust. So before you purchase find out what the uncapped property taxes will be. The second method of purchasing an REO (and maybe the best way) is to buy the mortgage and not the property. In other words, before the foreclosure is complete, buy the mortgage at a discount and then finish off the foreclosure. A bank can use the mortgage as collateral. As I have said to my students, the biggest mistake investors make is not discounting the mortgage when they buy real estate. Whenever there is a cash deal I always try to buy the mortgage first. even if there is only a small discount, it is still worth it. To learn more about creative real estate visit my real estate blog at StratherAcademy.com