Transcription
If a bank-owned property, or what's commonly referred to as an REO, is a property that has been foreclosed on where no one bought the property at the foreclosure auction, and the bank took back the property. Well, banks are not in the business of owning real estate; they're in the business of loaning money. So when a bank gets back a foreclosed property, they market it for sale with a local real estate agent and they sell it. Over the years, having flipped hundreds and probably thousands of properties, I would say bank-owned properties have probably been my best source of deals as a real estate investor. If you're not actively going after REOs, then you're missing out on a huge source of deals.
On today's video, I'm going to break it down, and I'm going to show you everything you need to know; specifically, 10 tips for getting bank-owned properties for cheap, coming up. Hi, it's Jerry Nora, and the nation's leading expert on flipping houses—even if that is self-proclaimed. First and foremost, a lot of people are confused about what a bank-owned property or REO is, and they wonder if an REO is different or the same as a foreclosure. So let's make sure that you're clear what an REO is, and let's quickly review the foreclosure timeline and sequence of events.
When a homeowner defaults on their loan with the bank, which usually means they stop making their payment, the bank begins legal proceedings to foreclose on the home. Since real estate is governed state by state, the rules and process will vary by state, but the basic process is the same. There are notices, and there's certain filings that have to take place. This phase in the timeline is known as pre-foreclosure and can take a few months to a year, sometimes even longer. As an investor, this is an opportunity since the homeowner is likely motivated to sell to prevent a foreclosure.
Well, if the homeowner doesn't catch up on the back payments or sell the property during the pre-foreclosure stage, the day of reckoning will come when the property is actually foreclosed on at the county courthouse, known as the foreclosure auction, which is phase two of a foreclosure. This is another opportunity for you as an investor to buy the property. The opening bid is usually what is owed to the bank. If no one buys it, the bank gets the property back. Now, in some states, the owner has redemption rights, which is more time to redeem or make whole the bank, but at some point, the bank gets back the property, and that takes us to our third phase of a foreclosure, which is when the bank owns it. Technically, it's no longer foreclosure because the bank owns it now, and this is what we call an REO. So when people loosely say foreclosure, it could be either pre-foreclosure, the actual foreclosure at the auction, or REO. On this video, we're going to focus the remainder of this video on phase 3, the REO. So let's do a deep dive and cover everything you need to know about dominating REOs.
Now, I have ten tips that I want to share with you, but first, if we've never met, I'm Gerry Norton, and this channel is dedicated to helping you make more money right now in real estate—not later in ten or twenty years, or even three to five years, but right now—so that you can achieve true financial freedom and live your dream life. Consider subscribing to my channel and click the bell icon to get notified when new videos are released. And be sure to stay to the end of this video because I have a free software that finds unrefreshed properties, including REOs, in any zip code in a matter of seconds. I'll tell you about how to get it for free, so stick around.
When the bank takes back a property, the first thing that happens is the REO is assigned to what's called an asset manager. The asset manager's job is to liquidate the property. Now this next part is extremely important: In most cases, the asset manager has a contractual agreement with a local licensed real estate agent who will get all of the bank's REOs in that specific area or region. So, for example, Bank of America has a contract with an agent in Atlanta, Georgia, so that agent will get all of the REO listings for Bank of America in Atlanta. Now it may be for a specific time, and there may be a handful of agents that split the listings, and some agents may represent big banks where they get a lot of listings, and some agents may represent small banks where they only get one or two REO listings per year. But here's my point: The bank hires a real estate agent to sell the REO, and in any given market, there are only a handful of agents who get the REO listings. I hope you see where I'm going with this.
So tip number one is to find out who the local REO agents are in your market. Once an agent is given an REO, they list it for sale on the Multiple Listing Service, or MLS, which is private, just between agents. But after the property goes on the MLS, other sites such as Zillow, Trulia, realtor.com, and Redfin make it public information on their websites, which means you can go back on sold transactions and active listings and do your research and find out who the REO listing agents are in your market. Tip number two is to build a relationship with the REO agents in your market. The way to do that is to follow my double-dip technique. This is where you go directly to the listing agent and you make offers directly to them on their listings without a buyer's agent representing you. You offer to let them represent you; by doing that, they get both sides of the commission and will be highly motivated to work with you on their REO listings. This is a game changer and so vitally important, so make sure you understand my double-dip technique. Watch this video to learn a detailed explanation of my double-dip technique.
Once an REO agent has a relationship with you, they will call you with their new listings, and you'll have a competitive advantage. I once flipped an REO property that was brought to me by an agent who I had done several deals with previously. He called me, and he told me about this property—it wasn't even listed—it was in a nice neighborhood, but the kitchen was ripped out, so the bank was looking for a cash offer since a homeowner wouldn't be able to get financing without a kitchen. I was able to secure the deal before anyone else even had a chance. I fixed it up and flipped it, and I made a seventy-five thousand dollar profit. That's how important the relationship is.
Tip number three is to make the offer regardless of asking price. I follow this rule with any type of seller, but what's so nice about REO is it's all business; there is no emotion, there is no drama, there is no seller crying at the kitchen table—none of that. It's so refreshing. They either accept your offer or they don't, and no one is offended at your offer, so just make the offer. Tip number four is to focus your offer on the closing date. Keep in mind an REO causes some real problems for the bank; it's a non-performing asset on their books, and depending on their month-end or their year-end reporting, the bank can become extremely motivated to sell the property, and hitting their deadline is very important to them. It's all about the timing with REOs; oftentimes, closing by a certain date is more important than the price. I've had several times where the bank accepted my low offer as long as I agreed to close by a certain date—usually the end of the month. One time, I had an REO agent call me on one of their listings that had been active for over a year; it was obviously overpriced, and the bank was not motivated to sell it. Well, the agent called me and gave me some insider information: He said his asset manager wants the property gone by the end of the month, no matter what. So I made a lowball offer that was half of the asking price, and they accepted it.
Tip number five is to justify your price. In my experience, banks are very level-headed. The asking price was determined by doing what's called a broker price opinion, or BPO, to determine the asset's value; it's basically an appraisal. But if you put together a compelling story about why the price should be lower, often they'll consider it. I've had the bank come back and ask me to show them three quotes for the repair work and then accept my offer. Tip number six is banks hate contingencies. They hate financing contingencies, which is why they'll often take a cash offer over a financing offer, even if it's a lower price. Always make your offers on REO as a cash buyer. They also hate inspection contingencies; they want to be certain that you're going to perform and not play games. What I'll often do is make my initial offer with a 10-day inspection contingency, and then during the countering and negotiating, I'll offer to remove it if the bank will come down to my price. Works like magic.
Tip number seven: For the same reason I just mentioned, banks want to know you're serious, and they expect a big earnest money deposit. This isn't like a private seller where you can do a $10 earnest money; you may be able to get away with a thousand dollar earnest money, but oftentimes banks want to see 10%, which can be pretty steep. Again, I'll come in with a low earnest money to start, like a thousand dollars, and then during negotiations, I'll offer a bigger earnest money, like five thousand dollars, if they'll come down to my price. Remember, closing on time is often more important than price, so use the other terms in your contract as negotiation tools. When you remove contingencies and you increase your earnest money, the bank feels more confident in your ability to perform. So tip number eight is to always perform. If you don't, and you back out of your contract, you'll likely burn a bridge with the REO listing agent. So before you lock up a deal, make sure you're confident in your numbers. Don't forget with REO agents, it's not just the deal in hand but future business—that's at stake. I once wholesaled the deal for a $5,000 loss just to save face with my REO agent because I wanted that agent to always count on me to perform and continue to bring me deals.
Tip number nine is you can wholesale REOs; it's no different than wholesaling private seller deals, but keep in mind all REOs have a no-assignment clause, which prevents you from doing a single closing and forces you to do a double closing, which is not ideal. Now I developed a workaround using a designated LLC; it's a really cool trick to still do a single closing, so watch this video to learn how. Tip number ten is if you're wholesaling, use my triple-dip technique to find a cash buyer. Once you have the contract, call back the REO listing agent and offer to pay them an additional commission of, say, two thousand dollars if they call all of the other investors who made offers on that property and offer to wholesale them the deal. I found that I can wholesale about 25% of my REO deals by doing that one technique. Now I did a video explaining the triple-dip technique in more detail, so be sure to watch that.
Now I'm glad you stayed to the end of this video because I developed a software tool that scans all of the on-market properties in any zip code, and it serves up a list of under-pressure properties, including REOs, that lets you know the best deals to go after. Now I'll give you access to the software for free; just click the link in the description. If you learn something in this video, show some love; hit that like button right now. And if you haven't yet, be sure to subscribe to my channel. I'm dedicated to helping you make more money and less time flipping houses so you can live your dream life. And remember, it's not about the money; it's about having the time and freedom to have, be, do, and give everything you want in life; that's what it's all about. And I'll see you on the next video.