By Eric Woolhiser

Making an investment in a pre-foreclosure property is a viable and intelligent way to enter the market. Owners in this situation are typically eager to make a deal, and if you can be in the right place at the right time with the right offer, there's an opportunity to create a win-win for all concerned.

What many investors don't realize however, is that there are often equally attractive opportunities among listed properties - provided you know where to look.

As you look through the MLS listings you may see some properties described in a curious way. Alongside the usual descriptive information is the phrase "sold as-is, as placed and with all defects" (or "as-is, where is" ). That's code for REO (Real Estate Owned) - a property taken back by the bank after failing to sell at auction. As foreclosure rates increase, we'll see more and more of these popping up, because there will simply be too much inventory for investors to swallow.

Bank owned properties listed on MLS - particularly those that require extensive rehab - represent terrific opportunities for investors.

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First, because the bank that owns the property is likely operating out of state. Often, the bank will have a deal with a major broker franchise that will then trickle the lead of the REO down to the local agent. The agent has a time limit on the listing contract and, particularly if there is rehab involved, wants to sell the property as quickly as possible.

Second, since "gut-to-studs" rehabs are unlikely to be owner occupied, these are less marketable in general. Unless the listing agent works with a lot of investors, he's likely to sell it to the first investor who steps forward. In addition, gut-to-studs properties are already free of tenants.

When investing in an REO, keep these few simple guidelines in mind:

1. Invest in improvements. Give yourself a couple of hours to look over the property with your builder (if you are using one) and your realtor. Look for opportunities like turning a half bath into a full bath, splitting a bedroom or moving laundry hookups to more modern locations like the top floor. If it's gut-to-studs, be creative... here's an opportunity to remove functional obsolescence, which will improve your chances with the appraisal when you retail it.

2. Ignore the list price when making your offer. Remember that as an investor, your job is to make a profit, and the price that you're ultimately willing to pay is a function of making the numbers work. Do the math: Get written and detailed estimates for any work that needs doing, add the profit you need, drop in your carrying costs, and develop a reasonable expectation of what it will retail for. Based on that calm, objective look at your profit needs - and only based on that - come up with your offer price.

3. Be prepared to work with the list agent. Upon receiving your (fact based) offer, the list agent may howl, curse and tell you there is no way the bank would even respond to your proposal. Hang in there. As I like to tell agents, "my job is just to put my buyer one dollar ahead of the market." Show comps, make the case that the property is not suited for an owner occupied buyer and express your confidence based on the research you've done. It may take some phone tag and the deal may die, but just as easily, you may get a call from the list agent in a month, once he realizes that you have the best offer on the market.

The fact is, once you get past the initial posturing and chest beating, the list agent may be your best advocate. He's the local eyes and ears, and will work to show the bank the value of your offer. Together with your agent, he can bring you to the finish line.

In summary, there are plenty of good deals to be made with listed properties. If you do your homework, make intelligent improvements and find an agent with an entrepreneurial mindset, REOs can be beautiful investments.

Eric Woolhiser is a REALTORŪ with EXIT Advantage Realty in Westford Massachusetts. His primary concentrations are negotiating short sales and helping investors purchase multifamily commercial properties in the Worcester area. He can be reached at eric@woolhiser.com.

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