Where are the REOs?

What are REOs? REOs or Real Estate Owned Properties are classified as Bank Owned Properties by a financial institution, lender, or loan insurer that had difficulty selling it off at an auction.

During the famous 2008 crisis, there were tons of REOs available all around. REOs were created initially by Mortgage delinquency. If you cannot pay your mortgage to a bank or financial institution, you must come to an agreement on the structure of the banknote. If there is enough equity in the property, the bank may let you hold onto the property for a bit depending on the state of the economy. However, if the economy is at any risk and showing signs of a recession like 2008, banks and lenders usually have less of a risk appetite.

Source: Newyorkfed.org

Right after the financial crisis in 2008, banks saw a ridiculous influx of mortgage delinquencies. Unlike the crazy delinquencies in 2007-2011, in 2022, we are seeing nothing even remotely close. In today’s economy, banks would rather hold onto the property and juice it out for the maximum value. That’s one of the main reasons investors aren’t having the same opportunity as before for real estate investing. Not to mention most borrowers can actually afford their houses when purchasing the home. REOs were great opportunities, especially after the 2008 recession. But not today.

However, if you take a closer look at the mortgage delinquency chart, starting to pick back up compared to before. It may not be that noticeable, but if you go to NewYorkFed.org, it will show a change in the tendencies.

Short Sales

There’s always a lot of confusion between Short Sales and REOs. A short sale is defined as a bank willing to accept an offer on the property for less than the total of all the mortgage balances. If the property has several liens and comes to a total mortgage balance of $500,000 but the property is only worth $400,000, the banks involved may force a short sale. If the owner is paying on time, it usually doesn’t happen.

Short Sales end up great for the borrower/current homeowner. You end up with the bank taking a loss and it not being reported on your credit. In the example above, if the short sale gets approved by the banks involved or the “lien holders”, then the $100,000 additional you owe would be forgiven. You basically walk away scotch free, and the banks have to take a huge loss.

REOs are different from short sales because the bank has acquired the property through the noteholder using a foreclosure process. If you ever go online and notice any properties in a “pre-foreclosure process”, it usually means the borrower/current homeowner has not been paying his bills.

Properties in the pre-foreclosure process are great investment opportunities. If you can negotiate a deal with the homeowner who will more than likely be motivated enough to pay off the loan balance and cut him a check, you may end up with ridiculous equity yourself. If it ends up with the bank, they will be sending it off to auction. When the minimum price point is not met at the auction, then the bank sets the REO.

Where are the REOs?

Investment Opportunities

Investors always do their due diligence when looking at these kinds of investment opportunities. These are great opportunities for the BRRRR method where you Buy the property, Rehab the property, rent it out to a tenant, refinance it to a lower rate while getting the cash-out, and Repeat it onto your next property.

Although the last couple of years has not presented a lot of opportunities for investors, the trends will start changing as Mortgage Delinquencies start to pick back up over the next Real Estate Cycle. Looking at previous historical economic cycles, the best one to compare this to is the 90s. However, even then the U.S. Economy was not in ridiculous debt while going through serious inflation. Only time will tell how Mortgage delinquencies and foreclosure opportunities impact us in the future.

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