In todays email:

• 🤓 What is an REO?

• ☝️ Discuss challenges to managing an REO

• 😬 Discuss a recent long distance REO rehab

• 😉 Tips on managing long distance properties

REO (Real Estate Owned)

REO refers to properties that have been foreclosed on by a lender and failed to sell at auction. Essentially, when someone doesn't pay their mortgage for a long time, the lender takes back the property through the foreclosure process. Once the lender owns the property, it becomes an REO on the books.

We primarily work with homeowner’s to do some type of loan modification or workout and keep them in the home. However, there are some instances where the home is vacant, and no one is living in the property. The homeowners do not want the property and therefore I initiate the foreclosure to get title to the property. If no one bids at auction to buy the property, then the property reverts back to me as the lender and at that time goes back on my books as an REO.

When I get an REO, I sell the property either as-is (at discounted price to market value) or repair the property and sell it to a retail buyer for full price.

The challenges of managing REOs

Managing REO properties can present several challenges for lenders:

1. Maintenance And Carrying Costs: Lenders are responsible for maintaining REO properties while they are in their possession. This includes expenses for repairs, upkeep, utilities, property taxes, and insurance. These costs can accumulate over time, especially if the property remains unsold for an extended period.

2. Market Volatility: The real estate market can be unpredictable, with fluctuations in property values, demand, and economic conditions. Lenders may struggle to sell REO properties in a timely manner if market conditions are unfavorable or if there is limited buyer interest.

3. Property Condition: REO properties may be in varying states of disrepair or neglect, depending on the circumstances of the foreclosure process and the previous occupants. Lenders may need to invest in renovations or improvements to make the property marketable, which can further increase expenses.

4. Title Issues: Clearing title defects and resolving legal issues associated with REO properties can be complex and time-consuming. Lenders must ensure that the title is free from encumbrances, liens, or other legal challenges that could impede the sale process.

5. Risk of Vandalism or Theft: Vacant REO properties are vulnerable to vandalism, theft, and other forms of property damage. Lenders may need to implement security measures or hire property management companies to protect the asset and minimize the risk of loss.

6. Regulatory Compliance: Lenders must adhere to regulatory requirements and legal obligations governing the management and sale of REO properties. Failure to comply with these regulations can result in fines, penalties, or legal liabilities.

Overall, managing REO properties requires careful attention to detail, financial resources, and expertise in navigating the complexities of the real estate market and legal landscape. Lenders must be proactive in addressing challenges and maximizing the value of their REO inventory to mitigate losses and optimize returns.

Key points to remember when managing REOs

Before you can secure a house, make sure you have the deed to the property typically a sheriff deed and make sure the property is vacant. Sometimes people do not move out after they are foreclosed upon and you have to get an ejectment before you enter the property. It is important to follow the rules.

We use a property preservation company to initially secure the property. The property preservation company can inspect the property and take photos which helps you make decisions on your exit strategy. They also secured the property by adding new locks, etc. Installing a lockbox is also a good idea so you are able to get inspections and repairs done. I also have the property preservation team turn off the main electrical breaker and water supply if possible. In addition, you can have these companies remove the trash inside the property, maintain the yard, etc.

Examples of Property Preservation Companies:

• There are many national preservation companies.

  • Sand Castle Field Services

    • https://www.sandcastlefs.com 

  • Financial Asset Services Inc

    • https://www.fasinc.com 

Current REO Rehab in Oklahoma

History

I purchased this note in November 2023 and immediately started the foreclosure process.

Note Purchase Price: $59,000

Judgement Amount: $101,873

Opening Bid: $89,500

We set the opening bid below the judgment amount to try to get it sold at auction but we were not successful selling it at auction. We got the property back and now in the process of renovating the property to sell at a much higher price.

The value of the property after rehab (cost ~$30k) will be around $140,000-150,000. The net profit should be around $35,000-45,000. This is a good return on the initial $59,000 investment in 1.5 years.

Tips On Managing Long Distance Properties:

Technology advancements has really helped me to do these long distance projects. Modern technology, such as video conferencing, project management software, and remote monitoring devices, makes it easier to manage renovations from a distance.

Depending on the level of renovation, you will probably need a general contractor to manage the renovation and report to you on a weekly basis on the status. However, on a simple flooring and paint type project, I don't feel like it is necessary to get a general contractor since I use an established professional flooring company and painting company in the area that has all the proper systems and people in place.

It is important to leveraging local expertise. You can tap into local expertise by working with contractors, real estate agents, or property managers who are knowledgeable about the area, its regulations, and the local real estate market. It really starts with reaching out to people in the area such as real estate agents that may have contacts of good carpenters, flooring people, painters, etc. Another way to call and speak to people at stores that sale DIY supplies like lumber stores, home goods stores, appliance stores, local hardware stores, paint stores, etc. They usually have many people they can recommend and that works super well.

When hiring someone to do a job, you definitely need to write up some type of contract spelling out what exactly they are going to do, when they will start, when they will finish, a detailed account of the costs (supplies, labor, etc.) and what happens if they don’t finish according to the schedule and your recourse if things are not done properly.

At the end of each project it would be wise to have a 3rd party (like a real estate agent or inspector) walk to the property and take notes and pictures to make sure things were done properly. In addition, I will have the contractor video the entire property and also take photos of each room and the areas where the work was completed.

Check out this prior newsletter for more details.

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