REO Companies: Foreclosure Property Investment on Autopilot
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The mortgage foreclosure process terminates with an auction that is referred to as a "Trustee's Sale" or a "Sheriff's Sale". Here, a residential property is auctioned off to the highest bidder and extinguishes all rights of ownership of the defaulting homeowner. If no one purchases the property at the auction, the title to the home reverts to the lender and it becomes what is known as an "REO Property" or "bank owned property". ("REO" is an acronym for "Real Estate Owned" by the bank).
WHAT SUCCESSFUL REO COMPANIES DO:
There are a lot of businesses that would like to think of themselves as "REO companies". However, most are not making any money and this is because they lack one or more of the following elements necessary for success:
- Experience: seasoned management
- Track record of success - documented, proven results
- Strong financials: cash flow and access to credit
- Long-term, corporate-level relationships with major banks & lenders
- Affiliations with real estate pros and contractors in every market
Successful REO companies have all of these attributes plus the proven business processes outlined below:
- Successful REO Companies request complete lists of all bank owned properties in inventory from their senior bank contacts at the national or regional levels. These are known as "REO tapes". These tapes are often provided to the REO companies before they are released to general public and smaller investors because they can buy homes in large quantities and quickly reduce the inventory of the bankís REOs significantly.
- The premier REO Companies have a network of real estate professionals in each market around the country that physically inspects the REO properties on the tapes. They create a separate file for each home, describing its condition, repairs needed, cost estimates, photos, comps and all other pertinent details about the house.
- Next, the REO companies will review all of the information and formulate a purchase price offer that they will submit to the banks for only those REO properties that they believe have good resale and profit potential. These offers will typically be no greater than 50-60% of the propertyís current market value. (This is where they make their money.)
- Upon bank approval, the REO properties are purchased.
- Next, the REO Companies send in their network of building contractors and handymen to make any repairs necessary to get the homes into "move-in" condition.
- Finally, the REO properties are listed for sale via their network of real estate professionals. The properties are typically priced under the current market value of surrounding neighborhood homes in order to sell very quickly.
And, believe it or not, the top REO Companies are so efficient that they can often buy, repair and resell their REO properties in as little as 4-6 months!
HOW TO INVEST IN REO COMPANIES:
A Professional REO Company will set out to acquire what is known as an "investment pool" of REO properties. Initially, they will seek out investors as "silent partners" to raise a certain amount of capital to help fund the investment pool of homes (i.e. To purchase REO homes from the banks).
NOTE: Silent partners are not involved in the day-to-day management of the investment pool, nor are they involved in the REO process. It is a "passive investment" for them. They simply sit back and let the REO companies do all of the work!
To exemplify how this works:
Letís say that an REO company will raise $5,000,000 from silent partner investors like you and me.
Once the $5,000,000 is raised, the REO company will typically go to a lending institution and initiate a short-term "bridge loan" for an additional amount of capital, by leveraging the $5,000,000 they have already raised. Letís say that this new loan is for an additional $10,000,000.
The REO company now has a total of $15,000,000 in buying power with which to acquire REO properties from the banks and create an investment pool of homes.
Next, the REO company will begin the process described in Steps 1-6 above. They will purchase "the cream of the crop" from the banksí REO property inventories until they reach their $15,000,000 spending limit. Now they have acquired their "investment pool" of homes. (e.g. 100 homes, averaging $150,000 each = $15,000,000.) * For our example this is 60% of market value - which is conservative.
As a silent partner, you would now be invested in this pool of 100 REO homes. After Steps 1-6 above are executed and all of the 100 homes have been sold, the investment process is completed.
* For this example, 60% of market value acquisition cost on our homes would translate to an average selling price of $250,000 each for a total of $25,000,000.
From the sales proceeds, the REO company pays all business expenses incurred ($3,300,000 or 13% of sales for our example). Then, the REO company will repay the $10,000,000 loan + loan fees of $700,000 to their lender. Next, they will repay the silent partners their original $5,000,000 investment. The remainder is a net profit of $6,000,000 to be shared proportionately with the silent partners.
Here is another way to look at it:
$ 5,000,000 Silent partners' investment
+ $10,000,000 Bridge loan amount
$15,000,000 TOTAL PAID for 100 REO homes @ 60% market value
$25,000,000 Total sales of 100 REO homes @ market value
- $ 3,300,000 Expenses (commissions, repairs, marketing, operations)
- $10,000,000 Repayment of bridge loan principal
- $ 700,000 Loan fees (10% APR, 6 months + 2 points)
- $ 5,000,000 Repayment of silent partnersí original investment
$ 6,000,000 NET PROFIT (to be shared with the silent partners)
The foreclosure market today is presenting investors with perhaps the greatest wealth building opportunity of our generation. And best of all, by investing with REO companies, it's passive income - the REO companies do all of the work for you!
The key to success with this method of foreclosure property investment is finding the right REO companies to invest with.
Feel free to contact the author for a recommendation: email@example.com
John Hanlin is an Independent Investment Consultant specializing in high yield, low risk investments secured by real estate. He is a seasoned investor of over 25 years and manages the investors' website: www.johnhanlin.com. John is also the author of "The LazyMan's Guide to Understanding Foreclosures & REO Property Investments" (now available at www.lazymancompany.com)