The New Rules Of Buying an REO Property

Investing in Real Estate and even just buying a home used to be pretty simple.  If you had a solid down payment and good credit you could buy just about anything you wanted.  How you were going to pay for it was your problem.  Today is an entirely different ball game.  Banks and real estate investors have been so badly beaten down by the mortgage crisis which is still going on, they are acting like “flippers” instead of banks or investors.

Take this house at 3631 Runningtide for instance; located in a very nice area of Huntington Beach, the property is listed as an “REO”.  Normally “REO” means bank owned.  This one is clearly different.  The agent tells us the “investor” won’t look at any offers under $999,000.  Since when does a bank or investor not want to see every offer out there?

After walking the house with an agent I discovered that the house was “staged”.  When you “stage” a house, you fill it with furniture and décor to make it look lived in.  This is great for people like my wife who are very tactile and need to “feel” what a room is like furnished.  This isn’t cheap though.  The investor for this property is paying for the furniture and décor, and that is on top of the taxes and opportunity costs of having the house sit empty.  Since when did banks or investors let a home sit for over 225 days and not take all offers?  It is happening now.

There have been some repairs and updates as well.  If a bank or lender bothered to paint a home before a sale it was a big deal.  Flippers would use quick cosmetic fixes to make 100% profit in days.  Finding foreclosures with new paint is pretty common today.

In the past, banks didn’t replace kitchen appliances, but this house on Runningtide has new ovens and a new cooktop.  Clearly this investor is updating the property hoping for a higher price.  This is another example of the investors using the tricks of the flipper to try and recover as much of their investment as possible.

It used to be that a serious flipper would try to buy at 40% of the local market value per square foot, clean up the house and quickly flip it for 80%-90% of market value so they aren’t stuck with the house.  As one very successful flipper told me, this is his vacation time because there just aren’t any deals like that to be found.  When an investor is willing to keep a high price on a home and let it sit for nearly a year like the Runningtide house in Huntington Beach, it makes it harder to find a property for 40% of market value.

All of the rules of real estate in Southern California have changed and continue to change every day.  New restrictions on loan sizes from the banks this month are going to make it even more of a challenge for both sellers and buyers, unless you have cash that is.

Keep one thing in mind, agents don’t make deals, sellers do.  Whenever possible, talk to the seller directly and find out what they really need.  If it is top dollar, then close your checkbook and move on.  If it is something you can help them with, make a deal happen.

Happy house hunting.

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