Bulk Reo Packages – An Unprecidented Opportunity
March 11, 2011
Over the last year or so there is a real estate investment strategy that has been gaining popularity. While you may have heard of purchasing REO properties from the bank, the current state of the market has given birth to a new way to obtain real estate investment properties at a significant discount. This strategy is known as bulk reo real estate.
REO stands for “Real Estate Owned” and it refers to a real estate property that was previously a security for a mortgage loan. The previous owner defaulted on the loan and the lending institution foreclosed on the owner and took over ownership of the property.
REOs are a problem for lending institutions. These institutions are not in the business of investing in real estate. They are in the business of loaning out money. When a property in their portfolio reaches REO status, the institution is losing money every day that this property remains under their ownership. Their goal is to get the property off their books as quickly as possible so they can go back to doing what they do best and that is lending out money to people. Banks also get audited once a year and if they have too many properties with REO status, the management team of the bank gets in trouble.
Normally when the bank takes the property back at auction, someone that works in the bank would either buy the property themselves or they would hire a real estate agency to list the property for them. The real estate agency will list the property at full market value, unless of course the property needs a lot of work. If the property needs work, the agency would discount the price accordingly to compensate for the work that is required to complete the work on the property. As such, the only way you can purchase REO properties at a discount is if you either have an inside contact at the bank itself or if you purchase from a real estate agency a property that needs work.
However, because of foreclosures being at an all time high, many institutions are finding that the current system of handling REOs is not working. They have too many properties that are being foreclosed upon and with a slow market, the real estate agencies cannot move these properties fast enough. As a result, the properties continue to sit on the market and the lending institution continues to lose money on these properties.
As a result, the lending institutions have come up with a new way to get rid of their excess inventory and that is through a process called bulk reo packages.
A bulk REO package is a group of properties that have been combined together and marketed as one package. The package may consist of actual real estate properties of all types and sizes, non performing loans for sale or a combination of both. The packages are usually grouped by geographical location, but can also be grouped by property type nationwide. The financial institution calculates how much each property is worth in the open market and then applies a discount, typically at 50 to 70 cents on the dollar.
There are two ways you can make money with bulk REO packages. The first way is if you purchase them yourself or put together a team of real estate investors to purchase them. REO packages typically start at $5 million and can be as high as $1 billion dollars. These deals can be purchased from the lending institution directly or a third party who is responsible for finding buyers. This individual is known as the sellers mandate.
If you have access to the type of money required to purchase a REO package, you can make a significant amount of money. The properties in the portfolio are going to be in a variety of different prices and conditions. Some of them you will be able to sell right away on the open market. Others will require work to be done before they can be sold. The discounts on each property may be small or very large.
Suppose you purchase a REO package for 5 million dollars. The package consists of 50 properties at $100,000 each that are worth $200,000 once fixed up and sold. Each property on average costs $20,000 to repair. There are several ways you can make money with this package.
You can immediately wholesale the 50 packages to investors at a profit. If you sell each house for $120,000, you are still leaving at least $60,000 profit for the investor that is buying the property from you. After selling all 50 properties you will walk away with over $1,000,000 profit.
You can fix up the properties and sell them yourself on the open market. If you invest $20,000 into each property for repairs, you stand to make up to $80,000 profit per house. After selling all 50 properties you will walk with over $4,000,000 profit.
Another option is to fix up the properties and keep them yourself. You can rent each property out to tenants and collect rent. Assuming each property is a single family unit and you can produce a positive cash flow of at least $200 a month, you can net a positive cash flow of $10,000 a month. This is of course assuming that the money that you invested into acquiring the properties was borrowed money. If you paid all cash for the properties and repairs, your cash flow could be as high as $100,000 a month.
You can also create lease options on the property and rent the properties to tenants with the option to buy at a later date. A lease option is a great strategy to employ in this current market as there are a lot of people out there that want to buy a house but can’t afford the down payment. The tenant pays you an option consideration at whatever price you decide. Should they later buy the house, the option consideration can be used as part of their down payment. However if they fail to buy the house, you get to keep the option consideration and lease the property to someone else.
What if you don’t have access to the large amounts of capital necessary to purchase bulk REO real estate? There is still another way that you can participate and profit from bulk REO packages. Sellers mandates are constantly looking for new buyers that they can sell their properties to. If you can find people who are interested in purchasing bulk REO packages and you can introduce them to the sellers mandate you can earn a commission not just on the initial package but any future packages the buyer purchases from the sellers mandate.
How much money is possible for helping to close a REO transaction?
Typically the financial institution will pay 3 points, which equals 3% of the final sales price for the package. Half of that commission will go to the sellers mandate and the other half will go to the people on the buyers side. If you are direct to the client, you keep the full half of the commission for yourself. If not, you will have to split your half with whoever else is on the buyers side of the transaction.
Suppose you find a sellers mandate for an REO package and you are able to refer a buyer directly. The REO package is worth 10 million. 3% of 10 million is $300,000. You would split the $300,000 in half, so you would walk away with $150,000 just for making the referral!
If you are dealing with a larger package, the commissions become even more lucrative. A 50 million dollar package with the same scenario would net you a commission of $750,000!
If you are going to get into the bulk REO game, now is the time to take action! These bulk REO deals are only going to be available for as long as foreclosures continue to remain a huge problem right now. Once the bubble ends and the inventory goes back to normal levels, lending institutions will go back to the normal way of handling REOs and there will no longer be an opportunity.
by: Mike Warren
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