How to Buy REO Commercial Properties?

For commercial property investing in REO, investors are always seeking to buy properties at a lower price. The most rewarding one is REO commercial property purchasing. Properties typically have massive discounts and massive potential, once you understand how things work.

 If you are a seasoned investor or a novice investor, you will realise that you learn how to buy REO properties to discover new sources of long-term gains.

Then, from the term REO foreclosure to looking for bank-owned real estate, and taking you step by step through the entire process of buying commercial foreclosures, you will know everything.

What Is REO in Real Estate?

REO stands for “real estate owned.” But what does the REO real estate definition include?

When a house is foreclosed due to the owner not paying for it, it is first offered for sale to the public. When no one buys it during the period of sale, then it reverts to the bank or lender. The house is now REO, meaning that the bank or lending institution owns the house legally.

Thus, an REO property is the property of the lender, typically a bank, which failed to sell at a foreclosure sale.

What Is a Commercial Foreclosure?

It is a good idea to learn about commercial real estate foreclosure before going ahead with the process of buying.

Commercial foreclosure occurs when the owner of commercial property—office buildings, retail buildings, or warehouses—is in default on the mortgage. The lender forecloses on it to recover the loan by taking over the property and selling it. If the property fails to sell at auction, it is a commercial REO property.

Commercial foreclosures also differ from residential foreclosures because they typically cost more money, require more confrontational negotiating, and require wider due diligence.

Why Invest in REO Commercial Properties?

Investing in REO commercial properties is a golden opportunity for many reasons:

Discounted prices: Banks are willing sellers. They would like to dispose of these non-performing assets off their balance sheet, and therefore, you can purchase below market price.

Transparent title: Banks generally clear outstanding liens or taxes before selling the REO property.

High ROI potential: After some upgrading or repairs, the properties can fetch high returns.

But they usually are in shambles and require some additional capital to turn them into profit-generating assets.

How to find bank-owned properties?

It is not difficult to locate bank-owned commercial buildings, but use these proven and tested methods:

1. Visit bank websites

Most banks list their REO properties in the “Real Estate” or “Property for Sale” category of their website. Wells Fargo, Bank of America, and JPMorgan Chase are some of the well-known banks that list REO commercial property listings.

2. REO listing services

Independent websites and listing websites that specialize in selling REO and commercial foreclosures are:

• LoopNet
• CREXi
• RealtyTrac
• Foreclosure.com

These websites allow one to search listings by location, price, type of property, and foreclosed status.

3. Hire a commercial real estate broker

An experienced commercial broker familiar with the REO real estate will be able to spot good deals, conduct due diligence, and even negotiate with banks for you.

4. Contact local banks and credit unions

Some of the local banks or credit unions will have commercial foreclosure listings that are not on the internet. Having good relationships with local lenders might provide you with advance notice of impending REO deals.

Steps to buy REO commercial property

Following is a step-by-step guide to purchasing an REO commercial property:

Step 1: Do your homework

First, learn the local market. Research comparable properties, average rent, and economic prospects of the neighborhood. Check the history of the REO property, condition, and appreciate potential.

Step 2: Get pre-approved for financing

Although banks can provide in-house financing, presenting a mortgage pre-approval letter from a well-established lender increases your negotiating power and credibility. Banks may even discount the price for all-cash transactions.

Step 3: Call the bank or listing agent

When you notice an REO listing, contact the bank’s real estate department, listing broker, or bank asset manager. Ask for property information, financial, repair history, and existing issues.

Step 4: Inspect the property

Foreclosed commercial real estate is sold “as is.” Use a certified property inspector or structural engineer to inspect the condition. Check roof leaks, heating/cooling, plumbing, electrical system, and structural integrity.

Step 5: Do due diligence

Do a proper due diligence before making an offer:

• Title search
• Zoning compliance
• Environmental reports
• Lease agreements (if it’s a tenant-occupied property)
• Property taxes and liens

 

Step 6: Make an offer

Approve your offer to the bank with proof of funds or a pre-approval letter. Negotiation is the norm, and the bank can counteroffer. REO sales require internal approvals, and therefore, there can be a delay.

Step 7: Close the transaction

After it is approved, close the transaction with a closing attorney or real estate attorney. Read over the purchase agreement, waive contingencies, and sign.

Commercial REO property purchase guidance

Be patient: Banks process REO proposals at a slower rate than ordinary sellers.

Obtain legal guidance: Always have an attorney review contracts and negotiate title issues.

Budget for fixes: Most REO properties require repairs or maintenance of some sort.

Work with experts: Agents or property managers, having an army of experts available at your command, can save money and time.

Common things to avoid

• Underestimating repair costs: Buyers often forget the extent of repairs needed.
• Ignoring zoning laws: Not all the properties are zoned for your desired business use.
• Skipping the inspection: You’re buying the property “as-is.” An inspection helps avoid nasty surprises.
• Delays in title transfer: Always verify if there are any prior existing liens or encumbrances.

 

Conclusion

REO commercial properties can be profitable investments if done strategically. By understanding the REO foreclosure meaning and adhering to procedures strictly, from finding the property to closing the sale, you can obtain valuable real estate at submarket prices and potentially reap enormous returns.

The process can be complex, but with thorough due diligence and a good team, you’ll be well on your way to becoming a successful investor in commercial real estate foreclosures.