How to Build Wealth by Investing in REO Companies

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 noone bids on or 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 like to consider themselves "REO Companies". However, most are not making any money. This is because they lack one or more of the following:

- Experience: seasoned management
- Track record of success
- Strong financials: cash flow and access to credit
- Long-term, corporate-level relationships with banks & lenders
- Affiliations with realtors and contractors in every market

Successful REO companies have all of these attributes and proven business processes as outlined below:

1) 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 bank’s REO’s significantly.

2) The premier REO Companies have networks of realtor and contractor associates "on the ground" around the country in each market that physically inspect each of the bank owned properties on the tapes. They create a separate file for each property, describing its condition, repairs needed, cost estimates, photos, comps and all other pertinent details about the house.

3) Their network of realtors provides a "BPO" (Broker Price Opinion) for each of the REO properties based on the current market value in "as is" condition. All of the information that is gathered helps them develop purchase price recommendations for each home on the tapes.

4) Next, the REO companies will review all the information, formulate and submit their offers to the banks for each one of the bank owned properties on the tapes that they believe has good resale and profit potential. As previously mentioned, offers will typically be no greater than 50-60% of the property’s calculated current market value. (This is where they make their money.)

5) Upon bank approval, the REO properties are purchased.

6) Next, the REO Companies send in their networks of building contractors to make any necessary repairs to get the homes into "move-in" condition.

7) Finally, the homes are listed for sale via their network of realtors. The properties are typically priced under the current market value as well as under most of the other homes that are listed for sale in the area in order to sell quickly.

And, believe it or not, some of these Professional REO Companies are so efficient that they can conduct their due diligence, buy, repair and resell their REO homes in an average of 4-6 months or less!

HOW TO INVEST WITH 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 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 Company do its thing. They are leveraging the knowledge & efforts of experts.

To exemplify how this works:

Let’s say that an REO Company will raise $5,000,000 from silent partner investors.

Once the $5,000,000 is raised, the REO Company will typically go to their lending institution(s) and initiate a short-term "bridge loan" for an additional amount of capital, leveraging the $5,000,000 they have already raised. Let’s say that this 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 and create an investment pool of homes.

Next, the REO Company will begin the investment process described in Steps 1-7 above. They will purchase "the cream of the crop" from the banks’ REO tapes until they reach their $15,000,000 limit. Now they have acquired their investment pool of homes. (Let’s say 100 homes, averaging $150,000 each = $15,000,000.)

As a silent partner, you would now be invested in this pool of 100 REO homes. When Steps 1-7 are completed and all of the 100 homes have been sold, the investment pool is closed.

For this example, let’s say the 100 homes sold for an average of $200,000 each for a total of $20,000,000.

Next, the REO Company will repay the $10,000,000 loan + interest of $500,000 to their lender. Then, they will repay the silent partners their original $5,000,000 investment. The remainder is a gross profit of $4,500,000 to be shared proportionately with the silent partners.

Here is another way to look at it:

$ 5,000,000 Silent partners’ original investment
+$10,000,000 Loan amount
--------------------
$15,000,000 Total buying power to purchase 100 REO homes

$20,000,000 Total sales proceeds from the 100 REO homes
- $10,000,000 Repayment of loan principal
- $ 500,000 Loan interest (10% APR, 6 months)
- $ 5,000,000 Repayment of silent partners’ original investment
--------------------
$ 4,500,000 Gross Profit (to be shared with the silent partners)

That would be a 30% Return on Investment in just 4-6 months! (Example)

SUMMARY

This author believes that the foreclosure market today is presenting investors with a wealth building opportunity that they will probably never see again in their lifetimes. And the key to success with foreclosure investments is finding the right REO company to invest with. Feel free to contact the author for recommendations: john@johnhanlin.com

REFERENCES:

a. "The LazyMan's Guide to Understanding Foreclosures & REO Property Investments" by John C. Hanlin, Author

b. Website: www.JohnHanlin.com by John C. Hanlin, Webmaster

Why You Should Invest In REO Companies
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