Although real estate mortgages are funded through banks, mortgage bankers, and their financial lending institutions, in most cases the money actually comes from two giant secondary lenders: Fannie Mae and Freddie Mac.

These are quasi-public organizations that create a secondary market for residential real estate loans. This means that when a bank creates a mortgage, it can then “sell” that mortgage to Fannie Mae or Freddie Mac and recoup most of its investment, which it can then loan out again. It continues to service the loan (collect the payments) for a fee, although it can also sell this servicing to some other similar organization if it chooses. (This is why, if you’ve ever had one of these mortgages, you find that the lender to whom you make payments is constantly changing.)

The Veterans Administration also offers bargain hunting opportunities. It guarantees the purchase of homes by eligible veterans. This basically means that if the veteran defaults on the mortgage, the VA will pay off the lender and take the property back. Although technically these are REOs, they arc commonly called VA repos.

VA repos are not found in high-priced areas because the VA maximum mortgage amount is fairly low by today’s standards ($240,000). However, in modest to low-priced areas where they are found, they can be excellent opportunities for investors who are willing to buy properties “as is” and in poor condition and then fix them up. You may be able to buy a VA foreclosure for a fraction of its market price.

Should I Get an Appraisal First?
You should certainly check out the property and get a comparative market analysis (CMA) so that you know what similar properties have sold for. That should be your guide as to how much to bid.

Some bidders will offer close to market price. Others will try to sneak in with a low bid. Sometimes, if there’s little interest in the house, the low bid¬der can walk away with it.

What Kinds of Problems Do REOs Have?
The problems with REOs are usually far less than for other repossessed property, but they do exist and can be severe on occasion. Frequently, the lender will pay for a policy of title insurance and will guarantee that your loan is indeed a first (no hidden liens) and that the title is clear.

TRAP

It’s up to you to investigate the property thoroughly, usually before you make your offer. Know what you’re buying. After the purchase you’re probably stuck with it.

This bypasses the REO department entirely, at least with regard to locat¬ing the properties. Remember that the foreclosure process involves adver¬tising the sale of the property and then holding a public auction. At that public auction, a price is paid and a deed is given, which is then recorded. All of this is public information, and if you have the time, you can go to the hall of records and dig it up. But there’s a better way.