Many investors looking to buy foreclosures debate on the merits of pursuing a bank-owned REO versus pre-foreclosure property. Getting a good deal on either type of foreclosure property requires dealing with the lender, understanding the timing for getting the best deal, having access to good financing and being realistic on the costs to renovate the property. See the following article from REIClub for more on this.

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That’s the big question for many investors looking to buy foreclosures – Should I buy an REO (bank owned property) or a pre-foreclosure (still owned by borrower, but in default)? How you answer that question can determine how easy or how difficult a time you have with your foreclosure investment.

Most investors, your author included, feel that buying an REO (an acronym for real estate owned) is a cleaner deal. Typically you are assured of good title to the property including title insurance. That means that usually you don’t have to worry about the old borrower/owner coming back trying to claim the property under some sort of extended equity of redemption, old taxes or liens that were unpaid, or even old owners or tenants who refuse to move out. (You did make having the property vacant a contingency of your REO offer, didn’t you?!)

All of these problems can occur if you attempt to buy a property in pre-foreclosure.

On the other hand, the biggest complaint investors have about REOs is that there are no real REO bargains. Rather, the lenders have rejuvenated the properties and are trying to sell them for full market value through an agent. How’s an investor supposed to flip a property bought at full market value?

It’s just the opposite for pre-foreclosures. The assumption here is that that a pre-foreclosure can, indeed, be bought for far below market value. Just get the borrower to sign it over, refi and/or flip, and you’ve made a huge profit.

Thus, the conventional wisdom goes, an REO may be cleaner, but there are no bargains. A pre-foreclosure can be more complicated, but you can get a real steal. Maybe.

In my own experience I’ve found that the value of REOs is greatly underappreciated, while the bargain value of pre-foreclosures is often overestimated. Here are 4 important questions to ask to help you decide which is the better investment avenue for you:

1. Do You Have To Deal With The Lender?

Dealing with a lender, as investors with recent experience know, can be a real burden. With an REO, you obviously have to deal with the lender, since it owns the property. Many investors complain that lenders are so overwhelmed by the number of foreclosures they have, that they don’t have the staff or the time to talk or act.

That’s certainly been true, but most lenders are now ramping up and many will soon be up to speed. Their REO departments often are the fastest growing element of their business.

On the other hand, when you’re b...

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