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Investing Strategies

The 6 Stages in the Lifecycle of an REO

MortgageSure you’re familiar with the term: REO property. And you probably know that it means it’s a property that’s owned by the bank.

But do you know the lifecycle of an REO? How a property goes from being owned by a homeowner to becoming a foreclosure…

Hey Moguls, Matt Andrews to let you know that there are actually 6 stages in the lifecycle of an REO – and we’re going to go through each one in today’s lesson.

Knowing this info will better prepare you if and when you decide you to do a deal involving an REO. Knowledge is power, as they say! (But who’s they?!)

So, REO stands for Real Estate Owned and means that the bank or another lending institution now has ownership of that property.

To figure out it gets there, let’s dive in to the 6 stages a property goes in the REO process…

6 Stages of an REO

Stage 1: Private Ownership

So this is the beginning, right? Mr. Sam Homeowner bought and owns this property. The house is in his hands – the original owner.

But, for whatever reason, he’s not able to meet the requirements that were agreed to in his loan – he can’t pay the mortgage. When he can’t make the payments, the bank or lender has the right to foreclose and the house goes into default.

At that point, many people would pursue a short sale option to avoid foreclosure (which is a whole lesson by itself, BTW).

But if Mr. Homeowner is in default and chooses not to pursue a short sale, it moves to the next stage…

Stage 2: Auction

At this stage, Mr. Homeowner has missed several mortgage payments, the property has gone into default and it then goes to auction.

The bank is legally allowed to sell the house at a public foreclosure auction to recover the money it lent on the house to the original buyer/owner since Mr. Homeowner can’t.

Buying properties at auction is a whole investing beast of a business unto itself. Depending on your market, it may be competitive – but no matter what, it can be very lucrative.

Now, if the property doesn’t sell at the auction, the bank ends up taking back the property, which moves it into Stage 3.

Stage 3: Bank Owned Property

Because the property was not sold at the foreclosure auction, this is simply the official stage in which the property is now owned by the bank or lending institution.

From here, several steps come into play…

Stage 4: Asset Manager

Once the bank takes back ownership of the property since it didn’t sell at the auction, the bank will assign it to an in-house asset manager. That person is now controlling what happens to that property – most likely it’s added to his portfolio of numerous other properties he is now managing on behalf of the bank.

foreclosureIt’s the asset manager’s job to then facilitate the sale of the property – it’s not like the bank wants to hang on to it! No! They want to sell it and get their money back – or at least some of their money.

This is also a stage where you – as an investor – could get involved in buying investment properties (similar to when you could scoop up deals in the auction phase, Stage 2). Just know that buying properties here is a very advanced strategy.

Stage 5: REO Broker

Once the asset manager has reviewed the details of the property, he begins working with an REO broker to sell the property, which is considered excess inventory for the bank. Remember, the bank wants it gone.

The REO broker is a Realtor who specializes in foreclosures and getting rid of the bank’s toxic asset.

At this point, lots of investors are picking up these deals on the MLS because the broker will have listed them there. Either you need access to the MLS or you need to have an agent on your team who access the MLS for you.

Stage 6: New Buyer

Hopefully, sooner than later, the foreclosure property is sold. Many times, it’s bought by an investor who can then wholesale it… fix & flip it… or hold it and rent it out.

There You Have It

And that, friends, is the typical cycle of an REO.

Here’s the key takeaway for you as an investor…

With the right acquisitions strategy, you can profit at just about any one of those stages: Stage 2 Auction; Stage 4 Asset Manager; Stage 5 REO Broker. There’s even a way to reach the homeowner before the auction based on public information such as the Notice of Default he gets from the bank.

So keep in mind that throughout these stages, there are ways that you can acquire properties with the right information and contacts.

And now that you know all 6 stages, I encourage you to consider adding foreclosure properties as a strategy in your investing business.

Questions, Comments?

Share an REO tip or ask a question in the comments section below.


Do It To It! Immediate Action Steps

Review and fully understand the REO process and its stages.

Head to an auction to check out that process and consider buying a property at this stage.

Search the MLS for REO properties that are typically sold at discounts.

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