| What are REO Properties? | | | | What Successful REO Asset Management |
| "REO" is an acronym that stands for "Real Estate | | | | Companies Do: |
| Owned" properties. A loose definition is: homes that | | | | 1) They request lists of bank owned residential |
| have been foreclosed upon and subsequently become | | | | property from their bank and lender contacts. These |
| the property of the foreclosing bank or lender. REO | | | | lists are often provided to these companies before |
| properties are also known as bank owned residential | | | | they are released to the general public because they |
| property, bank REOs, house foreclosures, etc. "REO | | | | typically will buy in bulk and can quickly reduce the |
| companies" are businesses that deal exclusively with | | | | inventory of bank REOs significantly. |
| these investments. | | | | 2) The best REO asset management companies |
| A New Industry Is Born: | | | | have networks of associates "on the ground" around |
| Foreclosure has been front page news across | | | | the country that physically inspect each of the |
| America for the past couple of years. And this | | | | foreclosure homes individually. They create a file for |
| phenomenon is expected to continue unabated for the | | | | each property, describing its condition and all relevant |
| next 2-3 years, if not longer. And, as a result, | | | | details regarding repairs that need to be made and |
| foreclosure property investment has become an | | | | any other pertinent issues (complete with photographs). |
| industry unto itself. This article is written to help | | | | 3) They have a network of appraisers who will |
| investors understand the REO properties business and | | | | provide a "BPO" (broker price opinion) for each of the |
| most importantly, the best way to profit from this | | | | REO properties based on its current market value in |
| tremendous opportunity: by investing in "specialized | | | | "as is" condition. This will help them formulate their |
| REO companies" . | | | | purchase price offer to the bank. |
| Today, at any point in time, there are several MILLION | | | | 4) Next, the REO companies will submit their offers to |
| homes in various stages of foreclosure. As a result, | | | | the banks for each bank owned residential property |
| companies that are completely dedicated to the | | | | that they believe has good resale potential. NOTE: |
| acquisition and resale of REO & bank owned | | | | offers will typically be no greater than 50-65% of the |
| residential property have been springing up all around | | | | calculated current market resale value of the home. |
| the United States. These are called "REO companies" | | | | (This is where they make their money!) |
| or "REO asset management companies". | | | | 5) Upon bank approval, the bank REOs are purchased. |
| Specialized REO Companies Emerge: | | | | 6) Then, the REO asset management companies |
| As foreclosure properties were just beginning to grab | | | | send in their networks of building contractors to make |
| headlines, various investors and real estate | | | | any necessary repairs to get the former REO |
| professionals began to approach banks and lenders | | | | properties into "move-in" condition. |
| for their lists of bank REOs. When the banks supplied | | | | 7) Finally, the homes are listed for sale via their |
| these lists, they also provided the selling prices that | | | | affiliated real estate brokers around the country. The |
| they would accept for those homes. There was some | | | | properties are then typically priced under current |
| negotiation room at that time, but the banks weren't | | | | market value in order to resell the the former REO |
| really willing to drop their prices too much below the | | | | properties quickly. |
| amount of their original loans to the former | | | | And, believe it or not, some of these REO companies |
| homeowners. At the time, making a foreclosure | | | | are so efficient that they can buy, repair and resell |
| property investment was basically an informal process | | | | these home in an average of 4-6 months! |
| done on a bank-by-bank, house-by-house basis. | | | | How To Invest In Successful REO Companies: |
| However, that changed when foreclosures began to | | | | Professional REO asset management companies will |
| sweep across the US like a tidal wave. Banks and | | | | set out to acquire what is called an "investment pool" |
| other lenders were literally being inundated with | | | | of bank owned residential property. Typically, they will |
| foreclosure properties every week and began to seek | | | | first seek out investors as "silent partners" to raise a |
| means to cut their losses and unload these bank | | | | certain amount of capital to help fund the pool. For an |
| REOs. This is because it costs money to hold onto a | | | | example, let's say they will raise $5,000,000. (This is |
| house with no payments coming in. The banks and | | | | money from investors like you and me.) The silent |
| other lenders still have to continue to pay fire | | | | investors are not involved in the day-to-day |
| insurance, maintenance, utilities and numerous other | | | | management of the pool. It is a "passive" investment |
| expenses on every one of their REO properties. As a | | | | for them. |
| result, they began to reduce their asking prices and | | | | Once the $5,000,000 is raised from investors, the REO |
| became more willing to negotiate in order to unload | | | | companies will usually go to their lending institution(s) |
| their ever-increasing inventories -- thus, an industry | | | | and initiate a new loan for an additional amount of |
| was born. | | | | capital -- leveraging the $5,000,000 of investor money |
| So, in the American entrepreneurial spirit, specialized | | | | that they have raised. Let's say that is another |
| new companies began to take shape. These new | | | | $10,000,000. Now, they have a total of $15,000,000 in |
| "REO companies" deal only with "distressed" real | | | | buying power with which to acquire bank REOs for |
| estate, including bank owned residential property, | | | | their investment pool of homes. |
| homes in various stages of foreclosure and homes | | | | Next, the REO companies will begin the processes |
| that are in jeopardy of foreclosure. An over-simplified | | | | listed above in Steps 1-7. They will purchase the |
| description of their business model is that they acquire | | | | "cream of the crop" from the bank REO lists until they |
| bank REOs well below the current market value, repair | | | | reach their $15,000,000 limit. Now they have acquired |
| them to "move-in" condition and resell them as soon as | | | | their pool of homes. (Let's say 100 homes, averaging |
| possible at a profit. | | | | $150,000 each.) |
| There are a lot of businesses that like to consider | | | | As an investor, you would now be invested in this pool |
| themselves "REO asset management companies". | | | | of REO properties. When all 100 homes in the pool are |
| However, most are not making any money. This is | | | | finally sold (often within 4-6 months), the pool is closed. |
| because they lack one or more of the following: | | | | At that time, the $10,000,000 loan is repaid and the |
| experience, strong management, funding/cash flow, | | | | investors are repaid their original investments (totalling |
| relationships with banks and lenders, networks of | | | | $5,000,000). Finally, net profits are calculated and |
| realtors, contractors and appraisers, etc. However, the | | | | investors are paid their pro-rated share of the profit. |
| REO companies that ARE profitable have ALL of | | | | NOTE: It is not uncommon for the top REO companies |
| these attributes and proven business processes as | | | | to payout HIGH double digit returns in just 4-6 months! |
| outlined below: | | | | |