Investing Trends

REO stands for Real Estate Owned and describes bank-repossessed properties.

Back in the late 1980s and early 1990s there was a rash of REOs on the market spawned after several years of creative financing intended to work-around ungodly interest rates. Anyone who sold real estate in those days would agree it was like the wild-wild west of real estate.

Banks, overly eager to make loans during a time when property sales were at a virtual stand still, threw caution to the wind and became more-than-willing to make loans to just about anyone able to propose a creative lending idea.

But we reap what we sow--within a few years, when it came to pay the piper, borrowers seemingly had no creative way to maintain the loan and many in turn lost their property to foreclosure. In response, this time eager to dump an overbearing load of repossessed properties, banks got the creative idea to sell them off through a specially-formed department they called REO.

It was like witnessing a financial train wreck. Fortunes were lost, reputations destroyed, and for many, the idea of ever sharing the American Dream got blown off the steps of courthouses across the nation into kingdom-come like piles of ashes.

For the decade following, banks tightened their lending practices and REO, with the exception of a few occasional foreclosures, became history.

But history does have a way of repeating itself. About five years ago banks again threw caution to the wind and seemingly decided to loan money to just about anyone breathing—whether they had the means to repay or not. In fact, they made it easy. Many loans got approved with zero down and included creative interest rates to keep the monthly payment low—at least for five years.

Can you guess the outcome? I believe we are about to see another outbreak of REO. In my area foreclosures are rising, and sources in Southern California are telling me there are clear and visible signs that it is just a matter of time before we see an REO pandemic--again.

My advice to real estate investors is to start watching the market for properties that must get sold (at below-market prices), and be prepared to react. If it sounds ghoulish to consider getting a good deal on the misfortune of others, keep this in mind: we are surely not wise enough to prevent it, but at least not so foolish that we would miss the opportunity.