I spent the better part of the last 10 years helping multiple banking clients and servicing or asset managers unload and liquidate their REOs also know as bank owned properties. Most of these properties are single family, condos or 2-4 unit residential buildings in the greater Cook and DuPage Counties. Most of the action started in 2008 but lasted till about 2018 as the market sold off and real estate stabilized, REO inventory declined. As a classic investor, an REO purchase is a great place to start. You can purchase the property for pennies on the dollar, clean title and mostly vacant and "as is". I always hear stories from other investors and brokers how they got a great deal basically stole the property away.
To understand the process of buying an REO, we need to revisit how a property becomes an REO. Back in the early 2000s, mortgage lending was abundant and ran loose. It was easy to apply and get approved for a mortgage on a 1-4 unit residential property. With limited documentation, basically taking the word of the borrower, the American Dream became a realty. As the economy dip and unemployment creeped up, lot of leveraged debt became unaffordable for the consumer to make payment. Most homeowners turned over their property to the bank called a deed in lieu of foreclosure, most braved the foreclosure process depending on the county law, stayed till the end or when the sheriff's office knocked on their door. This could have taken up to 16 months in some counties for the sheriff to receive a vacate order from the judge. Needless to say, the occupants were able to save their money and live life as normal for quite some time. When they did vacate, the REO owner would hire a local broker to access the property, clean it up and ready it for sale. This was the optimistic case. In most cases, the property was vacated much earlier but could not be accessed till the deed was recorded showing new ownership, the pipes had frozen, the HVAC was stolen or there was a squatter taking up residency inside which created a bigger problem for the owner.
This brings me back to buying an REO or better yet buying a property "as is" with no contingencies. What you see if what you get. Now this is great for an investor who has flipped homes and has a contracting back ground. Most buyers were novice. Thanks to shows like HGTV, they were able to grasp a knowledge of how to purchase and put together a budget of repairs after watching a few 30 minute shows. I saw a lot of offers where the buyers were offering $10...15..20k over list knowing well that they were buying as is. They quickly realized that they not only overbid on the property but also underbid on repairs. I always hear rehab is a lot harder than building new construction due to the unknown. My advice to novice investors is to partner with someone who has experience with purchasing as is properties from a bank, servicing group or a private seller. Also engage an architect with a background in mechanicals especially if you plan to do more than just cosmetic improvements. Talk to the city or village building department to confirm what you can or cannot improve to the property. You will be granted a minimum 5 day attorney review and inspection, use the time to hire an inspector to check the plumbing, hvac an electrical. If there are significant repairs needed, you can renegotiate with the seller. Do your homework, don't give the seller an unrealistic low ball offer unless the property has been on market for over 90 days. Most REO owners won't revisit valuation till 60 days on market. They actually won't look at an offer till it has been on the mls for 5 days so bugging your broker or the listing broker relentlessly won't help .Make sure you do your due diligence before entering into contract and complete an inspection during your attorney review. This will help you make a decision on moving forward, it will be well worth the $300-400 fee.