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Bank Owned (REO) versus Foreclosure PropertyPosted by ahc99 on May 8th, 2008

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With the sweep of foreclosures and REOs hitting throughout Southern California, it is tempting to start looking for good investment deals. The key is to find one property that can grow it’s own equity. I want to find a property with a monthly rental income that is able to cover it’s own mortgage expense, home insurance, property tax, and Homeowner’s Association (HOA) fee. And of course, I’ll be putting 20% down, even though some REO’s are now only requiring you to put 3% down (which is basically no money down, and we all know how well that worked out in the past).

Talking to our real estate agent yesterday, we found out that the best deals currently around the Los Angeles region are either Bank Owned (REO) or Foreclosure properties. So we asked what is the difference between these two types of properties and she told us:

• Foreclosure properties happen when the homeowner cannot pay their monthly home mortgage and are usually behind by three payments. The lender then files a Notice of Default and starts the foreclosure proceeding by trying to sell the property at a foreclosure auction. Usually the auction price starts with a minimum bid that includes the loan balance, accrued interest, attorney fees, and any other costs associated with the foreclosure process. An important thing to note is that the property is sold in an “as is” condition, which might include a disgruntled tenant still living in the property, property in a run down condition, or having other liens against the property such as a second mortgage. Thus, before buying any foreclosure property it is crucial to see pictures of both the interior and the exterior conditions of the property. Also, make sure to do a title search and verify there are no other liens against the property.
• Bank Owned (REO) properties are those real-estate owned properties (hence the REO) that were unable to be sold through the foreclosure proceedings. Thus, they revert back to property of the bank and is sold by the bank on the open market. Since the property is now owned by the bank, the previous mortgage loan no longer exists. In addition, the bank will handle the eviction of the current tenant and help perform some of the necessary repairs on the property. They also will negotiate with the IRS for removal of the tax liens and pay off any HOA dues. When a REO is sold, they receive a title insurance policy against any outstanding liens on the property. However, like the foreclosure property, banks also sell the property in an “as is” condition, but unlike how foreclosure properties don’t let you actually walk in and see the property, most banks will allow you to get all the inspections you want. Thus, with a REO, the buyer doesn’t need to beware as much.

After hearing about both types of properties from our real estate agent and investigating more online, the REO sounded like a much better investment than the foreclosure property. In addition, the bank has a higher incentive to get rid of the property because they don’t like to keep illiquid investments on hand. And with property foreclosures triggering all over Los Angeles, you can bet that the banks have a much larger than normal inventory of REOs.

Just asking our real estate agent yesterday about available REOs yesterday gave us two leads in the Diamond Bar area. Currently there are two REO condos in Diamond Bar selling for $200,000 each. Both are two bedroom and two bathrooms. The HOA fees for both are $400 and $250 a month. All things being equal, the $250/month REO condo sounds better since the HOA is a recurring monthly fee that would eat into my profits. We further asked about the going monthly rental income rate for condos in that area and she said it was $1,250 a month. That sounded about right. So then I fired up Bankrate.com to see what would the monthly mortgage payment be if I put 20% down on a $200,000 property, spread over 30 years at a 6.0% rate. After inputting the variables, it said $959.28 a month. Adding in the HOA fees ($250), home insurance ($50), and property tax ($166) would amount to $1,425 a month in costs. This would then put me in a hole by $175/month. Unless the rent can cover the $1,425 of costs I don’t think this would be a good idea. Otherwise, another alternative would be to put a larger down payment. I would then need a down payment that could decrease my monthly mortgage payment to $784/month. Using Bankrate.com again, I calculated that I would need to put about $70,000 down to accomplish that. A final way would be if I can get a lower interest rate than 6.0%. I need to rethink my options and see what is the best course to take.

Life After College?Posted by ahc99 on May 6th, 2008

Heh I just saw this comic on Digg about life after college/grad school and it’s crazy how true it is.

After I graduated from both college and grad school I expected to get an awesome job at one of the top firms of my industry. Lo and behold, it was much harder than expected and the competition can be pretty intense in Los Angeles. It didn’t matter that you had an advanced degree or good grades, for some reason everyone applying for the same job you are applying for had the same good or even better grades. The salary that the companies offered also couldn’t offset the amount of debt you owed for both college/grad school either. Add into that the fact that the standard of living is already sky high here, all newbies with no experience seem pretty screwed. The sad fact is that people in the industry don’t want to give you a job unless you have experience, and you won’t get any experience unless someone gives you a job. Catch 22 for anyone that wants a good job that pays enough to cover monthly expenses and have something to save for the future.

I think the best thing to do is to not set your bar too high when you graduate and expect companies to bow down to you and beg you to work at their office. Rather, the most important thing in the beginning is to just accept that you have no experience right now and try to build your skill set and network. As you learn more, your choices in life and confidence in your abilities will grow. I think it is important that after you graduate you take the job that pays decently, goes in the direction you want to go in life, and teaches you the things that you need to learn. Your first job shouldn’t be about becoming famous/being recognized or making the big bucks. Instead, it should be the building bricks of your foundation for your future career. In order to do that, you need to have realistic goals about your future job.

For me, I am slowly working towards the career that I want. I started out in a field that was pretty different than the career I expected to land in. But because of that job, I was able to get my foot in one of the top firms of my industry. Working there for a while has now landed me with another firm that is directly related to the career I want to work in. I will probably work here for a few more years and then move on somewhere else. I do seem to be a gypsy when it comes to jobs (this is the third place that I have worked at and I have only worked three years), but I generally start looking around once I think I have soaked up all of the information I can learn from the job. If I do work at another job it will be because I think I’ve learned all I can at this job and want to learn more someplace else.

I read recently that there is a shortage of jobs in China and at the same time there are too many college graduates. Too much supply and too little demand. As a result, at the job fairs the job hunters massively outnumbered the hiring companies. However, the article also said that there wasn’t actually a job shortage, there were just not enough jobs that were deemed “good enough” by the college graduates. The graduates refused to work at jobs that they believed were lower status than them. So instead, they would rather stay at home all day and just apply for those jobs that had 1000 candidates for 1 position opening. I was pretty shocked by this, I’ve always believed that if there is an opportunity right now, just seize it and hold on to it until something better comes along and then move up. Otherwise, you can be giving up opportunities to network and increase your skill set just because you are too stubborn and prideful. And seriously, nobody ever paid their rent with their pride. Everybody has got to start somewhere, and it might as well be at a small company with a job that doesn’t pay as well as you had hoped. But that’s alright because at least you’re gaining experience and out of the Catch 22.

Comic is originally from phdcomic.com.