REO properties or real estate owned properties belong to a bank or another lending institution. How does the institution eventually gain ownership of these properties? It begins after a borrower defaults on a mortgage and his/her property gets foreclosed. The lender tries to sell it via a short sale or at a public auction to cover the debt. If this does not happen, however, the lender takes possession of the property and tries to sell it through traditional channels such as real estate listings and agents.
The question is, are REO properties a good deal? It depends on a lot of factors, of course. You should look not just at the price, but at the other costs and its potential to bring returns as a rental. Some real estate investors build successful portfolios from such properties, but this does not mean every REO is a good real estate deal.
In this article, we look at how to analyze real estate deals in order to make successful investments. There are two steps to deciding whether or not an REO property is a good deal. First, understand the general pros and cons of buying this type of investment property and weigh them against each other. Then, look at the numbers of the real estate deal.
The Pros and Cons of Buying REO Properties
There are a few specific things you should know before investing in REO properties.
Pros
Probably the best thing about bank REO properties is that they are usually sold below market value. This is because the lender that owns them wants to recover as much of the debt as possible and be done with the property. They have no interest in making a profit from the sale. They just want to sell fast, which is a plus if you want to close the deal as soon as possible. So you may ask, are REO properties cheaper? Usually yes, compared to similar properties sold by private owners. But there are a few downsides.
Cons
A foreclosure takes about 18 months on average. During this time, the lending institution usually does not take very good care of the property. They do not want to pay for property management or maintenance because that means even more expenses on a bad debt property. This leaves REO properties in bad condition – they often look like abandoned properties. So you will have to spend a lot on renovations and upgrades even though the purchase price is good.
Related: The Ultimate Guide to the Rehab to Rent Real Estate Investment Strategy
Another disadvantage of the REO market is that you never know where a property might come up. If you are looking for an investment property for sale close to home – like the house next door to rent out – it might never happen. You will likely have to invest out of state. This is not so bad if you are prepared to be managing a rental property remotely or to hire a property manager to do it for you. But you have to be flexible about the property’s location.
That is why buying REO properties can be a double-edged sword. It is best to look around and compare to make sure you are meeting your own real estate investing goals.
Learn More: Pros and Cons of Buying REO Property for Real Estate Investing
How to Analyze REO Deals
Investment property analysis
The next step to evaluate if REO properties are a good deal is to do an investment property analysis. Mashvisor does it automatically for any property listed in its marketplace; you can even upload property from another website as well. If you only wish to find out its potential Airbnb income, you can use Mashvisor’s free Airbnb calculator instead.
The investment property calculator measures the return on investment based on the price, mortgage details, interest rate, and taxes. It uses historical data to estimate as accurately as possible the maintenance, insurance, HOA fees, and other costs to give you the full picture. Also, you can input and play around with the cost of repairs you plan to carry out as “one-time startup costs” to see how this would impact profitability.
On top of that, the calculator shows you a rental strategy analysis so you can see which type of renting – traditional vs Airbnb is more suitable for this particular REO property. It shows what rental income, cash on cash return, and cap rate you can expect. Thanks to real estate comps data (data from similar rental properties), it can tell you the occupancy rate as well.
Mashvisor’s Investment Property Calculator
Mashvisor’s investment property calculator provides you with all of the essential numbers you need to look at to determine whether or not a certain REO property makes for a good deal.
Neighborhood analysis
If you like a particular REO property and what rental potential it promises, the next step is to check the neighborhood it is located in. Is it a good place to own a long-term rental property or an Airbnb? Remember, with REO properties you are sometimes forced to settle for a certain location – but that doesn’t mean it has to be a bad location.
Mashvisor’s neighborhood analysis helps you figure all of this out. Visit the Neighborhood Analytics page on Mashvisor for any neighborhood in the US and get key info like occupancy rates, average returns, and more. You will even be able to see how other rental properties in the area have performed historically in terms of rental income.
This investment analysis gives the true answer to the question if REO properties are a good real estate deal. Some of them will turn out very lucrative based on expected income vs expenses. Others, on the other hand, may be in a run-down neighborhood with low rental prices or would need too much work to be competitive.
Conclusion: Some REO Properties Will Make for Great Deals
So no, not every REO property will be a good real estate deal. You have to conduct real estate investment analysis on REOs just as you would any other property for sale. To ensure you find a good REO deal in a short amount of time, start your search in the Mashvisor Property Marketplace.
Learn More: Mashvisor Property Marketplace: A Guide for Real Estate Investors