High Interest Bank had an REO on its books. It was a three-bedroom, two-bathroom house in a fairly good area of town. High interest Bank was hop­ing in the worst way that it could get rid of that property. It wanted to convert it from a liability back into a mortgage that paid interest, in other words, it wanted someone to buy the property.

Banks could rent an REO and generate some income in that fashion. However, their expertise is in lending, not in prop­erty management. Besides, a rented house is harder to sell than a vacant one. As a result, they usually won’t do this unless the market is so bad that they can’t otherwise dispose of their REOs.

To get rid of the property quickly, the bank was willing to accept a price of 10 percent below market. (The market was 315,000, and the lender would accept S135,000.) In addition the bank was willing to give a buyer a 30-year fixed-rate loan for 2 percent below the market interest rate and that with only 5 percent down.

Is it a bargain?  It is possible in many situations to get a better price, better financing, or a lower down payment. But what makes this a bargain is that all three areas are offered at better than normal conditions. As an all-around bargain prop­erty, this REO is hard to beat.

Why Do Lenders Try to Keep Their REOs Secret?

If I’ve whetted your appetite for REOs, you’ll have to hold in the reins for a bit. Sometimes there’s a problem finding out about them. One would think that as anxious as lenders are to get rid of REOs, they would be out there advertising and promoting them, doing their darnedest to get investors to buy them. But that’s not the case at all.

Although big hanks have become more open about their REOs and frequently list them with agents on the multiple-listing service (MLS), small banks can be very secretive about their REOs. They would prefer that most people don’t even know they exist. (And most people don’t.) They have three good reasons for keeping REOs quiet.

First, banks are corporations. Like other corporations, they have stock­holders. If the stockholders get wind of the fact that the lender has a large backlog of REOs, it’s going to erode investor confidence. Some nervous stockholders are going to begin selling stock. When that happens, others may hear of it and a general stock panic could ensue. The stock values could plummet, and that would hurt the lender, particularly if it’s a small local bank.
Second, banks depend on their depositors for their funds. Even though most lenders have federal deposit insurance up to $100,000 per account, depositors are finicky (particularly those who deposit more than S100,000). The rule seems to be: If I stick my money in a bank, 1 want to be sure the bank is in good shape even before I worry about the insurance.

If lenders acknowledged that they have a lot of REOs, it might shake depositors’ confidence. If depositors started pulling out their deposits, it could start a catastrophic run on the bank. With a large bank, this is unlikely. But it could be a serious problem for a small bank.

Finally, announcing a lot of foreclosed property could adversely affect the real estate market. If buyers were aware of what’s really out there in REOs, they might cut back on buying regular resales and new houses. This would hurt the lenders’ opportunities for making new mortgages.

These are three very good reasons that banks, particularly small ones, would like most of us to overlook the REOs that are out there.

How Many Bank REOs Are There?

I don’t know of any reliable figures for bank REOs, but the figure nation¬wide is probably more than 100,000. Large banks have hundreds, some¬times thousands. Smaller banks, however, may only have a handful. However, it’s with these smaller local banks that real opportu¬nities can abound.

The vast majority of bank REOs are houses and condos. Frequently, they are in fairly nice areas. A few are in the best areas … or the very worst.

Are All Bank REOs a Good Deal?

In many cases they are, although it really depends on what you’re looking for. REOs usually combine a little of all the items we look for in bargains. They are a little below market, the terms are a little better, the down payment is usually a little less, their locations are usually at least adequate, and there are usually no occupancy problems. However, if you want a big price discount, unusually terrific terms, or nothing down, you probably won’t find these here.
Bank REOs are often far better than average deals. Many are true bargains. But they usually aren’t steals. If you’re looking to “steal” a property, you’d best look elsewhere.

Are Small Bank REOs Better?

I’ve found this to be the case. With a large bank, there’s usually an established REO office for each region of the state. They process many proper¬ties and go through them quickly. Frequently, they have agents lined up to handle die listings. In other words it’s a production line, and it can be hard for you to break in and get individual attention.

With a local bank, however, there may be only half a dozen REOs a year. They are assigned to one of the bank’s officers, who handles the properties on a part-time basis. This person often already has a full work¬load, and this is piled on top. If you can present this officer with a way to gel rid of these REOs in a quick and economical fashion, he or she may jump at it. It’s a fact that many small bank REOs are disposed of privately.

Don’t think that there are only big banks around. Almost every community has a small local bank, or two or three. There are thousands of them across the country. The big banks dominate advertising, but the small banks are often highly profitable and have a pre- REOs they are dying to get rid of.