What Investment Properties to Buy (& How)

By now, you understand that a successful investor buys at prices to yield a suitable return based on market-realistic rent. 

Betting on appreciation has its place, but not if it means negative cash flow. Florida’s Space Coast provides the perfect mix of cash flow and appreciation! (More on that later.)

Sourcing New Properties for Purchase

Buying foreclosures at auction is hit or miss, because you often cannot view the property before bidding, and foreclosing banks often bid the price up and buy it themselves, eventually listing it as an REO property (Real Estate Owned: housing stock banks have in their inventory). 

Estate auctions can sometimes be a good deal.

Buying ‘short sales’ often worked well in the years immediately following the crash. Most banks were willing to allow an owner to sell their property for less than was owed, as it was a cheaper process than foreclosing. Banks have less financial incentive to allow short sales today. However, short sales still pop up on www.Auction.com before the home goes to auction. These are rarely a great deal.

Properties listed by Realtors® in the Multiple Listing Service (MLS) are by far the best source of great deals. 

All the major government players list their distressed properties with local real estate firms. The investment firms that purchased pool sales will list those properties with local real estate firms as well.

HUD, Fannie Mae, and Freddie Mac all have an initial period where they will only accept offers from certified owner occupants or non-profits. It is a felony to attempt to buy a home as an owner-occupant if you are not an owner-occupant, and the penalties are severe, with fines up to $250,000 and/or a prison sentence of not more than two years. 

A real estate agent with REO experience will know what is required by each agency and can help you get to the closing table and avoid legal problems.

Finding the Best Deals First

A good listing agent will inform past clients about a new property when it hits the market. Zillow.com uses public records to list properties in foreclosure that are not yet for sale. Unfortunately, many of these properties will never actually be listed for sale.

The best REO knows what is on the market regardless of who has them listed for sale. They maintain relationships with other REO agents and can represent you when you are ready to purchase a property. 

Your agent can also program your property preferences into the MLS so that whenever a property meeting your purchase criteria is listed, you immediately get an e-mail. 

Working With Your Realtor®

It is vital to understand how real estate agents, Realtors®—especially those who specialize in REO—work together and make a living. The best Realtors® are true professionals and live by the Realtor® Code of Ethics. Every Realtor® is licensed in their state but not every agent is a Realtor®. Unaffiliated sales agents and brokers do not have access to the same training and support as a Realtor®. 

Real estate agents are independent contractors. They pay their expenses. And their only compensation is commission when a property closes.

When a Realtor® lists a property, their brokerage is contracted to market the property for a commission, which is then split into two, shared between the seller’s brokerage and the buyer’s brokerage. Listing with a Realtor® incentivizes every other Realtor in the community to sell the property.

Marketing REO properties is far more intensive than listing a home for a private owner. There are larger personal investments in time and money, many times maintenance and repair costs must be paid by the listing brokerage, and then reimbursed by the asset management company. REO listings require regular at minimum, weekly inspections, condition reports, and Monthly Marketing Reports (MMR).

While a listing agent typically works directly for a seller, often an REO listing agent works for an asset management company, working for an institutional investor, adding layers of complexity to the process.

• Bank or Institutional Investor  – owns the property.
• Asset Management Company – hired by the bank to manage and sell it.
• Listing Agent – REO Specialist Realtor hired by an asset management company.
• Selling Agent – represents the buyer. (Can also be the listing agent.)
• The Buyer – buys the property with help from REO specialist Realtors.

The REO listing agent operates amidst multiple competing forces with conflicting agendas and goals, all looking to make a living or mitigate losses. Multiple participants can increase the time it takes the asset manager to respond to offers. And the while the listing agent may influence the timeline, they cannot control the seller’s response time.

How REO Agents Get Paid

REO commissions are structured so that all involved are financially encouraged to find a buyer. The listing agent typically pays a referral fee to the asset management company, but there is never a referral fee out of the sell-side commission. Therefore, the listing agent is highly motivated to sell a property to their clients. It is the same amount of work (or less), and having both sides of the deal helps the deal close quickly. 

Most importantly, when an agent has both sides of the transaction, they are better able to exceed the expectations of the asset management company and receive more listings in the future.

Final Thoughts

Working with an REO agent gives you access to a wealth of professional knowledge, which can make your good decision a great one. 

When you have a good relationship with a Realtor®, you can feel more comfortable that the decisions you’re making as an investor will pay off. Of course, there’s always some level of risk involved, but a true professional wants their clients to succeed – and your interests are our interests. 

Just like you’d trust a doctor for your healthcare or a lawyer with your legal needs, a Realtor® is your partner in navigating this industry. If you don’t already have a relationship with a licensed Realtor®, I would love to help you find one or work with you to ensure your investment goals are being addressed. 

After all, it’s not enough to buy a property; you want to make sure you’re buying the right one. That’s where we can help.