A Private Headache
There are many individuals who become involved in real estate repossessions unexpectedly and in an unwanted fashion. For example, Fred took back a second mortgage for $10,000 on his house 3 years ago. He thought he was through with the property.

But when it came time for the buyer to pay off the balloon on the second, the person defaulted. Fred was forced to start foreclosure proceedings and take back the property. Now Fred has a real headache.

The IRS lists property it has seized and is offering for sale on its Web site.

Generally, there are fewer than 100 properties at any given time, and they are scattered across the country. The terms for each piece vary, but the IRS usually wants a 20 percent deposit with your bid and all cash at the time of the sale. Cash means cash, certified check, cashier’s check, or some similar form of payment. The bidding procedures also vary somewhat, but they arc outlined for each property. When you click on the notice, you are told whom to contact, the bidding procedure, and photos of the real estate are given.

The General Services Administration (GSA) sells surplus real estate owned by the government. This property is acquired from a wide variety of sources. Some comes from the Internal Revenue Service (IRS), which acquires property from people who don’t pay their federal income taxes. Other properties come from other agencies of the federal government. The Property Disposal Office of the GSA has the responsibility of selling property to the highest bidder. Sometimes you can get extraordinary bargains here.

The GSA usually sells its properties using two methods: sealed bid and public auction.

making cash flow even/positive

Monthly rental income >= P.I.T.I.H.

My break-even point is *even* cash flow. The way I see it is that I can own a sharply discounted properties with nearly 100% bank financing. The rental income is even with P.I.T.I.H (principal, interest, tax, insurance and HOA fee). My cost is literally zero in owning this property. Over the long term, the principal will slowly get paid down. Rent will rise (that’s a certainty in high-inflation period). And eventually, price will rise. Even if I make no or very small monthly cash income, my long term benefit will be huge.

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!

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.)

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.