REOs (Real Estate Ownership) are bank-owned properties that have been deeded to the property owner’s lender due to a default on a mortgage or deed of trust. Typically, these properties are transferred to the lender through a deed-in-lieu of foreclosure, or a court action and resulting foreclosure auction. Once the bank controls the deed, they will begin marketing the property to get as much of your loan balance as possible.

It is estimated that 94% of all REOs will be purchased by investors, while the remaining 6% will be sold to the end users who will actually live in these homes. Often, the agency that guaranteed the homeowner’s loan will also finance a new buyer if he or she plans to live in the property. The high rate of investors to homeowners buying REOs is because most REOs need repairs ranging from minor to demolition.

Once an REO is listed for sale, an investor must determine their exit strategy before they even buy it. This is because you will either keep it or resell it; Either way, you have to make money or you won’t be in an investor for long. There are four exit strategies that an investor must choose from, including:

1. Wholesale is the most common method of REO reselling. Wholesale is where the investor takes a property under contract and resells it to another investor who will use one of the following exit strategies. Buyers of these properties purchase them from the wholesale investor with cash or hard money, financing is rarely available from the investor-seller.
2. Rehabbing and selling to a retail end-buyer is very common, but requires money to purchase the property, transportation costs, repair costs, selling costs, and some rehab knowledge if the investor does the work themselves. This is where the biggest returns are found when investing in REOs. Again, these properties are purchased for cash from a wholesaler or the lender’s asset manager; financing is rarely allowed.
3. Buy to let and lease property is a long-term strategy that requires a sharp mindset due to the various issues involved in dealing with tenants. Using a management company is a solution to everyday real estate problems. Whether buying from a wholesaler or from the asset manager, these are all cash transactions as well. However, a buyer can often obtain end-buyer financing through conventional lenders due to the cash flow of the units.
4. It is rarely used because it is not well understood by novice investors and is known as wholesale. In this situation, an REO is selected because it needs less than two weeks of repair and painting to bring it to very acceptable move-in condition. It is then sold to a retail buyer who is delighted with the neighborhood, local schools, or some feature of the property. The profits from these transactions can be as great as complete rehabs, but the investor must be selective when purchasing the property in terms of cost and amount of work required. Kitchens or bathrooms are never replaced in these rehabs.

In summary, there are four very productive methods to make money when investing in REO. The key, if you’re buying REO wholesale, is to know the after-repair value of the property and what your buyer will pay so that you have an expected profit on the deal. In general, rehabbers pay more, owners pay based on cash flow only, and wholesalers look for special features and minimal rehab work, but must pay a premium for these properties. Know your end buyer before you buy an REO, and make sure you have a solid list of buyers to market the property with as your best exit strategy.