Are Bank Owned Homes a Good Investment?

The new year is shaping up to be an amazing one for real estate investing. With all indications pointing to a resolution of our global pandemic, the economy could well leap ahead like never before.

Smart investors are looking ahead and thinking about buying bank owned homes.

Due to the calamity that struck the rental property business over the past 15 months, many investors and private homeowners have struggled due to loss of income. Mortgage moratoriums and governments, both local and national, that supported the idea of rent cancellation have run many small business property owners out of businesses or close to it. This (sadly) means that many more properties will become bank owned homes throughout this year. Let’s analyze whether these bank owned homes for sale are suitable investments, and if so, why.

Related: Buying Bank Owned Properties: 10 Pro Tips

What Are Bank Owned Homes?

As more properties become short sales, pre-foreclosures, or foreclosures, the inventory will evolve towards a greater number of bank owned homes for sale in the US housing market. Also called Real Estate Owned, or REOs, these properties can pose great investment opportunities for real estate investors able to acquire them. 

Bank owned homes are properties that were owned by either an investor or an occupant (homeowner) who could not pay the outstanding loans. As a result, the lenders foreclosed and took ownership. This is something they don’t like to do, but in some cases, must do. Banks are motivated to sell the properties off to new owners, but being banks, they slow-walk the process in some cases. Patience is always a virtue when one invests in REO homes.

Related: How to Buy Bank-Owned Property: 6 Great Tips

How to Find Bank-Owned Homes

Bank owned properties are located using the same tools one uses to find any real estate for sale. The banks use MLS listings, they employ realtors to sell the properties, and the listings appear on helpful real estate websites like Mashvisor. 

Occasionally a bank owned home is found in among off market properties, but that will take some legwork. You will need to see a home is abandoned and take action to identify the lender. This is not hard to do. All properties have the lender listed as public information. Start with your local town hall and ask the tax collectors if you can view the property cards or tax info for the property. Then, reach out to the lender and start asking for the person that can best help you. 

Lenders are interested in helping you find their properties. For example, Bank of America has a website devoted to its foreclosed homes. Using the site, you can locate bank owned homes from this lender near you.

Related: How to Find REO Properties: The Ultimate Beginner’s Guide

Bank Owned Homes vs. Foreclosed and Short Sale Properties

A bank owned home, a foreclosure sale, and a short sale are not one and the same. A bank owned property actually has more simplicity. In the case of a bank owned home, the seller is a specific entity, and the sale is a bit more conventional. Homes sold at auction, foreclosed properties, and short sales have their own pluses and many minuses. Let’s examine some pros and cons regarding bank owned homes:

Pros

• Outstanding liens and taxes should already be cleared (verify).
• There should be a single entity selling the property (unlike in a short sale).
• The sale is not an auction, so some inspections should be possible.
• The home should have been made secure and safe by the seller.
• The REO foreclosure should be free of occupants.
• There are relatively few other buyers, which means a low risk of a bidding war.
• The property is likely to be offered at a discount.

Cons

• Expect the home to indeed major renovations.
• This is an as-is sale, so you need to ensure you know what you are in for.
• Communications will be slow and methodical.
• Legal help is a must to ensure no loose ends.
• The home is likely to be an “ugly” house or unit due to neglect.
• Occupancy is likely to be delayed by months.

How to Know If a Bank Owned Home Sale Is A Good Deal

Analyzing a bank owned home for return on investment, cash on cash return, or any other normal metric is not hard. All new properties should be carefully evaluated, and the tools and methods Mashvisor offers all apply. 

In addition to the typical ways one would evaluate an REO property for a return on investment, be certain to add a few things to the cost side. First, the home is almost certainly going to need serious renovation, updates, and repairs. These will likely go beyond “paint and paper.” Expect to involve a home inspector, a general contractor, and a long list of subcontractors. Your cost of acquisition is only the start of the up-front costs of a REO real estate property.

You will be able to add all these costs in your analysis using the Mashvisor investment property calculator. Once you’ve entered the estimates extra costs, our real estate investment software will do all calculations so that you know what cash flow, cap rate, and cash on cash return to expect, for both the traditional and Airbnb strategy.

Time is money, and the saying goes. If you opt to purchase a bank owned home, you will need to invest more of your personal time than with a typical real estate investment. Banks will be polite, and they do want to sell the property. But remember, the person on the end of the phone is just a worker doing a job. They have a long list of homes to handle, and yours is just a number. Unlike a private seller, these nice people are not in a big hurry to make anything happen. Expect “bankers hours” and a lot of email and messaging, rather than the frantic pace most home sales/purchases have. 

If you use a buyer’s agent, ensure that you know how the agent you employ will be paid. Normally, a seller’s agent splits a commission with a buyer’s agent. However, that is not set in stone, and you should be certain of what costs you will bear in this regard. 

Last, since the home sat and will now need major renovations, filling the unit with a tenant is going to take months, not weeks. You will be paying the costs of ownership like taxes, utilities, and any loan costs during this period without the benefit of any rent coming in. Adding this into the up-front cost is a smart way to be sure your ROI is valid. 

The Real Upside to Bank-Owned Purchases

Cheap property for sale is rare. The fundamental reason why bank foreclosure homes for sale are worthwhile is the discount. Your plan is that the bank owned property can be purchased below market value and renovated to have a positive gain in equity. Perform a rental property analysis to be certain the discount reflects the fact that this is not a ready-for occupancy property. Otherwise, walk away and find a different opportunity. 

If you are interested in finding, analyzing, and purchasing bank owned homes, Mashvisor can help. We have the search tools, calculators, and listings you need. Why not try Mashvisor today? Get started by clicking here.