Just Who’s Buying Sub-$50K REOs?

Local – and in many instances, part-time or inexperienced – investors are a major buyer force when it comes to real estate owned properties (REOs) priced at or below $50,000, a new survey finds. The survey, which comes from Econohomes, also indicates that most buyers of low-priced REOs are interested in repairing the properties and are, either by choice or by force, employing rental strategies instead of flipping immediately.

Econohomes, an Austin, Texas-based company that purchases discounted assets in bulk and resells them individually, surveyed some 1,000-plus investors last year to get a sense of the more common traits among distressed-REO buyers. Fifty-seven percent of respondents intend to repair and rent, the survey says.

‘The preponderance of people buying from us are improving the properties and actually renting rather than reselling,’ says Jeff Ball, president and CEO of Econohomes. Particularly in hard-hit markets, where such low-priced REOs are increasingly the norm, unemployment rates are typically high and individuals' credit scores and balance sheets are badly hurting, Ball adds.

Claude Worrell, a Minnesota-based REO broker with RE/MAX Results, observes that buyers of low-priced REOs may prefer to flip properties but, after finding a cool reception in the market, ultimately choose to rent.
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Most homes that fall in the below-$50,000 category are uninhabitable or, at best, barely inhabitable, REO brokers say. Although severe price depreciation overall has, in turn, increased the proportion of low-priced REOs that are ‘safe, dry, warm,’ the majority would not pass a Federal Housing Administration inspection or appraisal, nor would they likely meet a local rental code without significant repairs, Ball says.

This finding might help explain why nearly 85% of the respondents to Econohomes' survey purchase homes that are located either in their city or their immediate neighborhood. A close proximity between investor buyers and their purchases makes sense, says Adam Palmisciano, owner of South Jersey REO. Because most of the product priced at or below the $50,000 mark is uninhabitable, he says, repairs are usually required to bring the properties up to inhabitable condition.

‘Also several of these investors do the repairs themselves, or if they use contractors, they can keep close tabs on the repairs that are being done to the properties,’ Palmisciano says.

Four or five years ago, sub-$50,000 properties were not even in the conversation. Now, ‘it's become a reality of the market today,’ Palmisciano says. He explains the price fall in Atlantic City, N.J.: Before the collapse of the housing market, a typical three-bedroom, one-bathroom row house was selling for upward of $160,000. That same type of housing in the city is now moving for between $25,000 and $50,000, he says.

Palmisciano speculates that close to 60% of all housing in Bridgeton, N.J., meanwhile, is investor-owned rental property. ‘That has created a reduction in values,’ he says.
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As part of the survey, Econohomes asked respondents to describe how much experience they have investing in REOs. Thirty-nine percent described themselves as new investors, and 38% are part-time investors. Only 20% called themselves ‘seasoned’ investors, and a slimmer 13% work full-time on their REO investments.

‘A lot of these investors are new to investing,’ Ball says. ‘I wouldn't say that that's surprising, but I would say it presents an opportunity and risk.’

Relative to the stock or bond markets, investing in REO may seem digestible and stable. That's the opportunity side of it, Ball says. On the other hand, ‘not too dissimilar from day traders, new investors may be getting in over their head,’ he adds.

Price and property location are the most important considerations for potential REO buyers, respondents said. Clean title and condition were a distant third and fourth, respectively. ‘This implies that as long as the price and location of a property fit their criteria, buyers can handle condition issues either personally or with professional help,’ Econohomes says in its report.
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Of course, with such low-priced product, concerns other than proximity to the buyer may be rolled into the location discussion. ‘Location obviously plays a big role in a buying decision,’ Palmisciano concurs, adding that crime, parking and ‘even drive-by shootings, which we have in a few communities that have the properties that fall in the category of $50,000 homes,’ are major considerations.

Besides being sold to small-budget investors, deeply discounted REOs – or distressed properties that fit the characteristics – are moving over to community ownership, Worrell says. Some Minnesota cities have successfully used federal funding, via the Neighborhood Stabilization Program, to acquire vacant and abandoned properties. Though it is a clear policy initiative of cities and municipalities to push REOs into owner occupancy, the buyer demand from prospective homeowners cannot realistically match the supply, Ball says. Bridge capital from investors is a necessity, he adds.

‘It's not going to come from the government, [and] it's not going to come from philanthropy,’ he says. ‘It's got to come from private capital. I think disposition strategies that focus on getting these properties into hands of small investors in a fast, streamlined process is the key.’

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