The Bulk REO Game

The Bulk REO (Real Estate Owned) Game

The only thing I can’t resist …,  is temptation

The government sponsored lending agencies are now the largest holders of defaulted real estate notes and distressed properties in the country and they will liquidate these swollen assets through Bulk REO (Real Estate Owned after foreclosure) sales and selling of the non performing notes over the next several years.  Investors seeking to buy these defaulted assets should be fully informed of the risks as well as the opportunities in this speculative game.

What are the myths and realities of Bulk REO and what perspectives can be gained that might assist us in the acquisition of non performing notes and other related real estate investment opportunities? It is important to keep in mind that any non performing real estate note is one step away from foreclosure (REO status) and needs to be evaluated with that risk in mind.

Let’s start at the beginning – What is Bulk REO? , What are some of the challenges of acquiring it? And most importantly, what are the real exit strategies that might leave you with a profit?

Bulk REO – A lending institution with a group of non performing real estate will first list them on the local MLS (Multiple Listing Service).  What doesn’t sell will be put up for auction and the portion that still remains will become the Bulk REO.

What are some of the challenges of acquiring Bulk REO?

The buying process – A very seasoned Bulk REO buyer having traded thousands of these properties over the last five years has described the process as an “all cash” / 48 hour turnaround time (minimal time for due diligence) process to become a winning bidder on a pool of Bulk REO.  These pools are traded in an “all or none” bidding process (you must buy the entire pool with no exceptions to pick and choose) which inevitably leads to a 10% or more “shrinkage factor” for burnouts or houses that just do not exist anymore.

With all of that said Trailing “quit claim” deeds – are the biggest challenge facing Bulk REO buyers. The weakest form of transfer of real estate is the “quit claim” deed  – it only assures the new buyer of the sellers “quitting his claim” in any interest in the property and nothing more.  This is the way Bulk REO is traded and this “trailing deed” might not arrive for months afterward.  This has been a huge problem when cities like Cleveland Ohio have developed aggressive policies to levy multi thousand dollar daily fines to entities that are buying these distressed properties.  Imagine buying an REO in Cleveland for a dollar and having tens or hundreds of thousands of dollars in levied fines against you by the time the “trailing deed” arrived at your door.

Where are the majority of these Bulk REO properties?

The most economically challenged parts of the country will dominate the demographics of national Bulk REO buying.  Good examples are the “rust belt” cities of Detroit Michigan or Cleveland Ohio.  In 1942 Detroit had a thriving population of 2 million – today the population is 900,000 with a 27% unemployment rate and a 50% “underemployment” rate of low paying subsistence level jobs.  Detroit is a shrinking city where the mayor has plans to consolidate the city from the existing 26 to 7 zip codes to reallocate the over stretched police, fire, school and other city services.  These lots that these homes and buildings occupy are better served to be plowed under and returned to the farmland they once were.  Many aggressive investors looking to profit from this economic downturn and mortgage meltdown have been “tempted” by these “nearly free” REO opportunities trying to calculate “ how can I possibly lose when paying so little”

Well, read on…

It doesn’t take much imagination to predict what might be the condition of the house no one bought after an MLS listing, an auction, and finally relegated to the Bulk REO pile.   After months or years of an empty property in a challenged neighborhood where the “locals” notice these kinds of “empty house opportunities” the end result is usually not a good thing.  My understanding of the “crack” drug market is that all of the copper plumbing and copper electrical wiring can be stripped and sold for about an $80 black market profit.  Additionally, the roofs and foundations are typically a problem, which makes these houses “un-financeable” to a retail owner occupant buyer.

Who then can buy these distressed Bulk REO houses?

Enter the “buy and sell” or “buy and hold” real estate speculator.

I want to emphasize that I added the “buy and hold” category because many of these properties – even after a complete rehabilitation – cannot be sold or financed with a conventional loan.  The lack of buyers and or bank financing will quickly turn you into an “accidental landlord/lender” if you are not careful.

This is where the story gets exciting…

Managing low-end properties from across the country (or even close to home) is a skill that is not for most and especially not for amateurs.

Here is a story from a friend who manages several thousand of these long distance REO’s and has “cracked the code” on this management issue (this may help you evaluate if this type of investment/management is for you):

Ok – u are now the owner of a $5,000 bank REO that looks very similar to the humble home that you or your parents grew up in. You invest $10,000 to fix the roof, foundation, and replace the stripped wiring and copper plumbing and plan to beat the “losing landlord trap” by actually creating an owner financing arrangement with your new borrower – Terms as follows: $500 down, $400 a month until this newly valued (by you) $30,000 house is paid off. This gives the new very marginally qualified occupant a pride of ownership interest in the property for a very low down payment and a mortgage payment that is actually hundreds of dollars below the monthly rent of the surrounding neighbors rental properties. The numbers here appear to be very interesting – A total of $15,000 in to a single family home investment with almost $5,000 per year in income gets all of your investment income back to you in 3 years  – and many more years of cash flow.

Break out your calculator and run the numbers on that one – The projected return?   Off the charts!!

Beware of people that are masters of the financial calculator and making financial investment projections. A projection is just that and nothing more – they have not as of yet developed a calculator with an “R” key to accurately measure RISK – the most important factor in any investment.

Felon management of your tenant/borrowers

How are you going to find that local property manager to collect those payments that regularly do not show up in the mail?  An expert in this market has the solution- he hires a local ex felon who knows “the hood”. You supply your new ex felon property manager with a truck, a cell phone, and a local house (he supplies his own weapons) and he completes all repairs, collects and distributes your cash and oversees your management operation.

This is the real world and the reality of what it takes to manage these types of properties – if you have not experienced “the hood” I strongly suggest that you spend ample time there (yes, even at night when the “creepy crawlers” emerge).  You need to be crystal clear BEFORE your real estate investment or non performing note purchase if you have the stomach and the nerve to succeed in this market.

For some great video on Bulk REO Google “Odell Barnes” and watch some amazing stories of the Bulk REO game – and stay tuned to our past and more of our upcoming articles…

To Your Prosperity,

Gordon Moss

Quixote Ventures, Inc.