Nonperforming Loans vs. Bank Owned REOs – What’s the Difference?
To make real estate investing work for you, you must always consider the economic conditions that dictate which type of real estate investment is the best choice at any given time. Do you know your basics? What are bank-owned REOs or non-performing loans? What is the difference between the two? It’s really quite simple.
Both nonperforming loans and bank-owned REO properties are the unfortunate children of the economic downturn. As the economic crisis grows, so does the loss of housing as struggling homeowners can’t keep up with their loans and mortgages.
An adaptation of the well-known nursery rhyme “First comes a bad loan, then comes a foreclosure” is a good one to illustrate the progression of dealing with distressed properties and the main difference between the two concepts. While they undoubtedly walked the same path, the difference is how far each of them is.
Let’s say a homeowner can’t afford to make loan payments anymore. The first month the bank lets it slide. On the second month they send the letter. The hammer falls on the third – the property is declared non-performing loan. For all intents and purposes, a non-performing home loan is a loan for a property that is past due or at risk of default, where the homeowner can no longer make payments. With some exceptions, three months is all a homeowner has to turn over before their loan is declared delinquent. And in the current economic conditions, non-performing loans are mushrooming. Financial corporations specializing in non-performing loans will assist in purchasing a loan that best suits individual financial portfolios. By liquidating the assets involved, they can realistically provide good value. But not a 50% off price. Not with additional repairs to the property. Not bulk. And certainly not without tons of paperwork and fees. None of the things the bank owned REO can and will do to move the sale along.
On the other hand, a bank-owned REO property is the next step on the distressed property timeline. No payment on a home loan will sooner or later result in “walking the plank,” in other words, the dreaded foreclosure. The foreclosure unceremoniously dumps the problem property on the auction table. Properties that cannot be auctioned end up as Bank Owned REO Properties. In the current economy, banks have a veritable tsunami of real estate coming their way. In an effort to recoup at least some money and clear the books, banks are selling bank-owned REO properties like tomatoes on the local market, with a discount, liens and other costs on the removed home.
While both are viable options for a real estate investor, everyone wants to buy where the deal is better. And in real estate, affordable, bulk, plentiful and flexible bank-owned REOs are far superior to sometimes expensive and non-performing loans.
And who wouldn’t choose a trade that will bring maximum profit with minimum investment, fast.
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