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Real Estate Investing in REOs Guide for Beginners

By Jeanette Joy Fisher 

Although interests remain relatively low, the number of home foreclosures across the country is on the rise up, which means that investors in REOs are beginning to have more opportunities to make money.

REO is an abbreviation for Real Estate Owned, generally homes that have been foreclosed by lenders who are now looking to unload those properties as quickly as possible. REOs have long been a favorite of investors, because lenders are generally willing to sell at a significant discount and often offer special terms to get them off their books.

Motivated Sellers

The key is that lenders are in the business of lending money to buy homes: they're not in the home ownership business. When they take possession of a home, they're motivated to get rid of it as quickly as possible, and often offer incentives to encourage fast sales--including low down payments, special rates, carpet and paint allowances, and reasonable selling prices.

Often REOs end up in the lender's portfolio after the home has failed to sell at an auction. Most of the time, that's because the amount owed was more than the property was worth on the open market, so the lender has already eaten a substantial amount of money, even before the property was put up for sale--generally making them some of the most motivated sellers you'll ever encounter.

Some lenders will do minimal repairs (and some will even do extensive work or offer allowances for upgrades) as well as negotiating with the IRS to remove tax liens. That means the property comes with a clear title, an important bonus.

As with any investment, do your homework before you make an offer. Even though the listing prices may already be a good deal, don't be afraid to ask for a lower price, better interest rate, help with points, repair allowances, or whatever will help sweeten the deal. You may be surprised at what they'll take, just to get an REO off their books.

Explore Your Options

All lenders sell their REOs differently. Some use real estate companies, while others have REO departments that sell directly to buyers. Make your offer, but expect a counteroffer, because lenders owe it to their stockholders to get as much as possible for REOs. On the other hand, they don't want to hold onto them long, so you may find their counter well within your investment guidelines.

You'll often be able to inspect the property, but not always. Many REOs are rundown, because the owners didn't have the money to maintain them. But if you do your homework, REOs can be a great source of profit for savvy real estate investors.

Copyright � 2006 Jeanette J. Fisher

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