Because titles to the majority of foreclosed properties end up with the lender, you may find that your next opportunity to purchase the property is from the lender's real estate owned (REO) department that specializes in handling foreclosed properties. Some investors have found that this is one of the best times to buy a property because they're not dealing with an emotional or unreliable owner. Discovering the ins and outs of the lenders' policies and procedures of disposing of these foreclosed properties can be invaluable to your goal of buying real estate at below market prices.
The days of stealing prime REO properties from the Resolution Trust Corporation (RTC) are gone. The RTC was a quasi-federal government entity established by congress to dispose of the tremendous number of foreclosed assets of the major lenders during the property market downturn in the early '90s. Due to the numbers of properties and the relative inexperience of and limited due diligence by the RTC in some areas of the country, a once-in- a-lifetime real estate investment opportunity did fall into the lap of savvy rental property investors who had large amounts of cash, could act quickly, and then had the financial horsepower to ride out the market downturn.
Lender REOs remain one of the favourite strategies for the late-night infomercial gurus, but the reality is that the lenders are neither foolish nor benevolent. Although these nonperforming loans are a negative on their balance sheet, they're not going to sell a property below its market value just to get it off their books.
The disposition specialists in the REO department are professionals who understand the real estate markets well and are usually wired into the best property brokers in the market. These mortgage brokers are often compensated as a percentage of the sales price and thus also motivated to achieve the highest value as is reasonably possible.
The only angle a real estate investor usually has with an REO is financing and the continued operating losses that often occur because the lender is merely holding the property and isn't willing to invest the time and money necessary to enhance the property physically and reposition it to perform better in the market.
Sales are as-is, and lenders are often exempt from the standard disclosure rules. When lenders have an excessive number of REOs, they become more flexible, but they're often limited by the Office of Thrift Supervision (OTS), a government agency that oversees many savings banks and savings and loan associations and routinely audits their loan portfolio and their REOs.