Foreclosure Blog

Everyone has definitely heard about the simple way to make money, almost each of us knows from early childhood that if one buys something low and then sells it high, the difference will top up your bank account. When it comes to real estate investment we have to admit, that the same rule works here, but “to buy low” in this case means to invest money in HUD foreclosure.

HUD is the short name for Department of Housing and Urban Development; this Department is a branch of Federal Housing Authority or just FHA. In order to minimize the risks of financial institutions Federal Housing Authority gives guarantees for some of bank loans. Usually FHA guarantees certain range of programs, as an example one can name first time buyer program. It is really widespread nowadays and its main advantage is, that program gives the buyer ability to become an owner of new house just with three percent down payment.

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When somebody is going to buy a house, the obvious question may appear: what is the difference between foreclosure and REO? Property can appear on the market in different ways, but the article below will explain the main characteristics, which make difference between REO and foreclosure.

The first thing to understand is that REO house is actually a foreclosure house. It may sound somehow strange in the beginning, but let’s look through the whole process of REO appearance.
When house owner is not able to do payments to cover his mortgage loan, the house appears in foreclosure list. On this stage of process the foreclosure auction is held, so everybody can attend it and buy a property offered. But if there are no buyers for house, the financial institution (bank) becomes owner of it, and after it happens foreclosure becomes REO property.

During the auction the house is considered to be a foreclosure, so if you buy it, you become the owner of foreclosure house. So what is the main difference between these two terms?

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As a rule the value of property sold on foreclosure market doesn’t cover the loan, because the debt is usually higher, then property price. This fact may become a barrier for selling the security and it sometimes happen, that no bidders appear on foreclosure auction. As it is easy to understand, it leads to the fact that in great amount of cases property is not sold and bank itself or other financial institution becomes the owner of real estate, used as lien. This kind of property is called real estate owned or just REO.

When the property belongs to bank officially, debt doesn’t exist any longer, loan disappears. But becoming an owner of real estate, bank gets all the responsibilities concerning it, for example paying association fees and all tax payments as well. Financial institutions give certain time for previous homeowners to leave the house and start doing some preparations such as repairing to sell the real estate object with higher price.

There are certain advantages of buying the foreclosure real estate, because it is liquid and buyer gets substantial leverage, so speculating with average returns can bring you good income. Financial institutions usually want to sell REO property as soon as possible and to get the highest return from this operation. The reason is, that bank doesn’t want to turn his money into reserves keeping the real estate on balance, and more over managing the REO property is an additional problem, which bank doesn’t really need.

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Almost everybody is aware of situation on the foreclosure market today, as it is widely highlighted in mass media. The amount of foreclosures we face now have broken all previous records. This situation looks like a real disaster for homeowners, who are loosing their property; on the other hand it creates problems for lenders as they have no ability to take such a big number of REO properties back. But one have to admit, that increasing number of foreclosures on the market gives great advantages for real estate investors, because they have chance to get high profit and at the same time to help other participants of foreclosure market. All in all one can take an advantage of opportunities described in three possible ways:

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