REOs with over-corrected pricing are located in working class or lower income neigbhorhoods. They are not necessarily crime-ridden or dilapidated areas. Before the subprime crisis, these places used to have median prices around 300K range. Now, banks put up fire-sales and depressed prices to 100K and below. We are presented with a rare profit opportunity that only shows up in a very special condition in history. I bet this opportunity may disappear in 12-24 months. To put it simply, the general market has not bottomed, but some over-corrected REO properties have hit bottom. For example, one property I am buying has the same asking price as that recorded in 1986 transaction from county tax record. All these billions of dollars of loss that banks are writing off are actually being realized from these fire-sales. Banks lose, you gain!

I am not a real estate agent. I am just an investor. I profit nothing if you go ahead and buy these properties. However, I love to share with everyone so people are not missing a rare opportunity in life. I admit that REO investing can be tricky. You can still pay too much for them if you don’t do your homework, for example, those that can’t meet 1% cash flow rule are over priced no matter how much “discount” you see from 2006 sales. The rule of thumb is, of course, the age-old 1% rule in roughly evaluating cash flow, and you don’t want to pay more than 20% in down payment. Basically, you have to evaluate 10-20 such REO properties and find one or two that can present the best bargain and cash flow. Rule #1 is cash flow. Focus on today’s income, defocus on pie-in-the-sky future appreciation potential. For example, the other day, I ran into a REO that’s priced at 50K something, it needs some work. But this house changed hands in 2005 for 240K. If I rehab it with 15K, I can make it shine. I can rent this house out for $1100/month, yielding 300-400/month income. Therefore, this house is a sure-win. Unfortunately, I didn’t get it because somebody else out-bid me. It often become very competitive to bid properties at extreme pricing. But if you try hard, you will get one of the super bargains sooner or later. I observed that some competitors are now scoping up these cheap properties by the dozens, then roll them under their LLC. These people are smart people and they are gold rushing in reverse order.

Another huddle to people is renting such properties in lower income neighbhorhoods. That can be more challenging than in upper income neighbhorhoods. To ensure success, you must learn the landlording skills. I always say, the key skill in rental business is not buying a house with good cash flow, that’s the easy part relatively speaking. The key skill is landlording. Many people can’t get past landlording hurdle.