What You Need to Know About Buying an REO Property in 2020

IL real estate attorney, Illinois real estate lawyer, If you are trying to find a new home at a good price, you might have family and friends mentioning that you try to find a foreclosure property. In theory, this is not a bad idea. A home that is for sale because the current owner defaulted on his or her mortgage could sell for far below market value. In the wake of COVID-19, however, foreclosures have all but stopped, thanks largely to a moratorium put in place on foreclosures on federally insured mortgages. Private lenders have mostly followed suit, which means that there are probably not many foreclosure properties available. The good news is that you may have another option for finding a good value: a real estate owned home, more commonly known as an REO property.

What Is an REO Property?

When a home is foreclosed on due to default on the mortgage, the lender (or current holder of the mortgage loan) will eventually seize the home and attempt to sell it. This sale usually takes place at a public auction. In most cases, a foreclosure auction does not give participants the opportunity to see the property or inspect the home ahead of time. This means that bidders are effectively making offers on a property about which they know very little. Additionally, the highest bidder is usually required to pay cash for the property at the time of the auction. Financing is uncommon at foreclosure auctions.

With all of this in mind, some foreclosure auctions do not result in the sale of the home. If the property does not sell, it still belongs to the bank or lender. At this point, the home is considered real estate owned or REO.

Buying an REO Home

Once a property becomes REO, the bank will usually start to take steps to sell the home. After all, the lender already lost money on the defaulted mortgage, so there is a vested interest in making some of that money back. An REO transaction is handled in much the same way as a standard real estate deal. The bank may enlist the help of a real estate agent to get the home listed on the “normal” listings. Prospective buyers can see the home and have it inspected. They can also make regular offers and arrange financing instead of having to frantically outbid other buyers at the auction.

Most REO properties are sold “as is,” which means that any repairs that need to be done will usually be the buyer’s responsibility. The selling lender is unlikely to arrange for the repairs or to drop the price to account for them. Therefore, it is advisable to include a contingency clause with your offer that gives the option of canceling the deal if the inspection reveals that the repair bill will be more than you can handle.

Why an REO Property Might Work Now

As the Chicago region and the rest of the country slowly starts to open back up again amidst concerns regarding COVID-19, the real estate market has suddenly flooded with people looking to buy a new home. In fact, the influx of prospective buyers has, by most accounts, tilted the market pretty substantially in favor of those with homes to sell. It can be tough to buy a home in a “seller’s market,” as prices are often higher, and sellers are less willing to include extra considerations in the deal compared to sale in a “buyer’s market.”

While there are significantly fewer foreclosures in process right now, a seller’s market gives lenders the incentive to get their REO properties listed and up for sale. REO properties are still typically priced on the lower end of the price range for comparable listings, so you might be able to find a great deal even in a seller’s market.

Call a Wheaton Real Estate Lawyer for Guidance

As things start to get back to some semblance of normal in the wake of COVID-19, lenders will be seeking to move REO homes as quickly as they can. While deals are out there, the process of buying an REO property can be complex. Contact an experienced DuPage County residential real estate attorney to get the help you need. Call 630-665-2500 for a confidential consultation at Stock, Carlson & Duff LLC today.

 

Sources:

https://www.investopedia.com/terms/r/realestateowned.asp

https://www.forbes.com/sites/forbesrealestatecouncil/2020/09/21/a-newfound-reality-buyers-currently-outnumber-sellers-in-housing-market/

https://www.washingtonpost.com/business/2020/09/10/home-prices-reach-record-high/

Property Valuations in Commercial Real Estate Deals

commercial real estate, Wheaton real estate attorneysIf you have decided to acquire any type of commercial property, it is important to be sure that the price you will pay is a fair one. Commercial real estate transactions typically involve the exchange of large amounts of money, which makes a proper valuation critical. In fact, a valuation is generally a requirement for real estate deals that are backed by lender financing.

Understanding Appraisals

A commercial property valuation is accomplished by means of an appraisal that is conducted by an approved appraiser. In order to be qualified as an appraiser, an individuals must undergo specialized education or training, and, in most cases, be certified by a professional organization of appraisers. A real estate broker is not considered to be a qualified appraiser—unless, of course, he or she has completed the necessary certification and training. Therefore, if the broker sets the initial sale price of the property, it is not necessarily backed by a qualified appraisal.

A qualified appraiser may choose from three methods of establishing a property’s value. The most appropriate method will depend on the type of property and how the property will be used in the future. An appraiser may utilize the:

  • Income capitalization method: This approach is most often used to evaluate properties that produce income, such as rental residential and commercial rental properties and shopping centers. The income capitalization method focuses on the property’s potential to generate revenue and the expected rate of return for the investor. Factors such as the condition of the property or its location are not given significant weight;
  • Sales and market comparison method: This method is commonly utilized to establish a value for single-family residential properties, but it can have commercial property applications as well. Under this approach, the appraiser will compare the recent sale prices of similar properties while taking into account the health of the local real estate market. A property sold during a boom, for example, will not be a good comparison if the market is currently slowed or depressed.
  • Cost method: The cost method takes into account the property’s value, including any improvements and the land itself and subtracts any depreciation that may have occurred. The goal is to determine if the buyer  would be better off buying the property or building a new, similar property.

In addition to being a requirement for a bank-financed transaction, appraisals are often needed for commercial real estate disputes. If the dispute reaches the courtroom, multiple appraisals may be conducted and it will be up the court to determine which value will be used in deciding the outcome of the dispute.

Call a Wheaton Real Estate Lawyer

If you are in a situation where you need a commercial property appraisal, the experienced DuPage County real estate attorneys at Stock, Carlson & Duff LLC can help. We work with a network of trusted appraisers, and we will assist you in obtaining an accurate valuation of the property in question. Call 630-665-2500 for a confidential consultation today.

Sources:

https://www.investopedia.com/articles/realestate/12/real-estate-valuation.asp

https://homeguides.sfgate.com/three-methods-appraising-commercial-real-estate-value-1567.html

Purchasing Investment Property – Five Considerations to Make Before You Buy

DuPage County real estate lawyersInvesting in real estate can be a lucrative move for the financially savvy, but for those that fail to do their homework, there is a risk of severe financial loss. Learn how you can be a part of the former group of investors, rather than the latter, by avoiding some of the most common real estate investment pitfalls. You shall also discover how an experienced attorney can help reduce the risk of complications in your next real estate transaction.

How Much Will It Cost? 

Calculating the cost of a property can get a little complex, especially for the novice investor. That is because there is more to cost than the sale price, closing costs, and title fees. There could be zoning problems that need to be corrected before you can rent or sell the property, and distressed properties, which are common in the real estate investment sector, could have more damage than you initially thought. As such, investors are encouraged to perform their due diligence before purchasing an investment property, especially if it needs repairs.

How Will Location Impact Your ROI?

Location is everything, especially when it comes to investment property. Prime locations will typically cost more, but they tend to have a higher return-on-investment (ROI). In contrast, properties that are in sub-prime locations are more affordable, but they may have a lower ROI. Areas that are up-and-coming may have a lower ROI to start with, but they may provide you with long-term gains. You could also find yourself dealing with a property that is located in a distressed or declining area, and that might require you to loosen your renting requirements to obtain any sort of gain. In other words, choose your location wisely and always consider how the location could impact your ROI, both immediately and in the long-run.

Who Will Manage Your Property? 

While some investors make great property managers, others lack the skills or temperament to deal with tenants and their potential issues. For example, an investor may have a great deal of compassion, so they may be willing to rent to a tenant based on circumstance, rather than their ability to pay. Sadly, this can place the investor at a serious risk for financial loss – and possibly even financial devastation if they manage several properties in the very same manner. If you fear you cannot manage your property effectively, or you would simply like to ensure you have more time to focus on your portfolio, you may want to consider hiring a property management company instead of handling everything on your own.

Are You Following the "Rules" of Investment?

Investment gurus have one hard and fast rule: never invest in a property that cannot make at least one percent of its cost in the course of a month. In short, if a home is costing you $250,000 to purchase and prepare for tenants, you need to be able to rent it out for at least $2,500 each month. If you cannot make this, or if the pricing is unreasonable for the area, it may be best to find another property. There are exceptions, of course, but investors are discouraged from making them without the guidance and advice of a seasoned professional.

Have You Accounted for the Unexpected?

Seasoned investors know that upfront expenses, such as repairs and closing costs, are sometimes just the beginning. There may be other unexpected expenses, such as taxes and insurance as well. Plan for them and you will be more likely to experience a hefty return on your investment, but fail to do so and you could lose a substantial amount on your next transaction.

Contact Our Skilled Wheaton Real Estate Attorneys 

When you need protection in an investment transaction, Stock, Carlson & Duff LLC is the firm to call. Dedicated and experienced, our Wheaton real estate attorneys can assist you in performing your due diligence, and we can help ensure you have not missed any pertinent details. Schedule your personalized consultation to get started. Call 630-665-2500 today.

Source:

https://www.forbes.com/sites/forbesrealestatecouncil/2017/09/11/seven-things-to-consider-when-buying-an-investment-rental-property/#6f46d3b46dad