Bulk REO Properties: Are They Right For You?

As the phrase would have you believe, bulk REO properties are none other than homes that were previously repossessed and sold in bulk tracts. Those closer to the industry may know bulk REO properties by their less colloquial phrasing: bulk REO tapes. Regardless of what you call them, bulk REO properties warrant your consideration, as few strategies can award investors with a greater opportunity. It’s worth noting, however, that only those that know how to navigate the bulk REO process will be rewarded accordingly.

The true brilliance behind buying REO properties is made apparent when you uncover the origin of these assets. Understanding where REO properties come from will give you a better idea of how to approach the bank when it comes time to buy one — or many.

The Truth Behind Bulk REO Properties

In their simplest form, REOs are nothing more than properties that have previously been foreclosed on. For one reason or another, the respective owner was unable to comply with predetermined mortgage obligations and fell behind on payments. In doing so, the owner forced the banks hand into repossessing the property. In taking control of the asset, the bank then tries to sell the property at auction and recoup any losses incurred from loosing a borrower to foreclosure.

The bank will typically start the bidding on the property at the amount sill owed on the mortgage, as to compensate for loosing the previous owner to foreclosure. There are a number of reasons foreclosed properties may not sell at auction. Perhaps the amount owed on the mortgage exceeds the home’s current market value or perhaps there are structural issues totaling thousands of dollars and years worth of headaches. Just know this: homes don’t always sell at auction. And when they don’t, the bank assumes ownership.

Otherwise known as an REO, repossessed properties that don’t sell at auction are then cataloged under the original lender’s books. And as I am sure you are aware, banks have developed quite the backlog of REOs following one of the worst recessions in American history. For what it’s worth, banks are sitting on a lot of inventory they repossessed over the past decade; that’s an important distinction. If for nothing else, banks aren’t in the business of holding onto properties that aren’t bringing in money; they would rather collect interest from borrowers that have yet to default.

Instead of holding on to said inventory, it’s safe to assume banks would rather rid themselves of what can only be described as non-performing assets, and that’s where you come in. Investors would love to invest in bulk REO properties and banks would love nothing more than to sell the homes that are currently detracting form their bottomline; it’s the definition of a win-win. When the two sides come together to work out a deal, bulk REO properties become one of the most exciting exit strategies known to investors.

It’s true: bulk REO properties can be a great way for investors to acquire deals. However, that’s not to say it’s going to be easy. It’s not uncommon for traditional lending institutions to be extremely “picky” when choosing suitors for bulk REO deals. Only those that have demonstrated an increased propensity towards financial resources and the wherewithal needed to successfully navigate such a complex real estate transaction will be able to land a bulk REO deal.

As a bulk REO properties investor, it’s your responsibility to convince the bank that you are more than capable of handling such a deal. In order to succeed as a bulk REO investor, you must first prove that you have easy access to capital. It also doesn’t hurt to develop a working rapport with well-capitalized investment firms, REO asset management companies and REO bank departments. Banks are already difficult to work with; there is no need to make things harder than they need to be. If you are already on the same page as those handling REOs, you already have a leg up on the competition you might encounter. It’s also worth pointing out that, success in bulk REO investing can be achieved through proper training, planning and analysis.

Financing Bulk REO Properties

The sheer volume of your standard bulk REO property deal makes it difficult for investors to front their own cash. As a result, most investors looking to acquire REO properties in bulk turn to loans, conventional or not. If you already have a private money lender waiting in the wings, you are on the right track, as they will provide fast money free of possible complications. However, if you are looking to finance bulk REO properties traditionally, banks tend to prefer conventional mortgages to FHA or VA loans. Just know this: if you decided to go the conventional mortgage route, you must get a pre-qualification letter from a reputable lender before you even discuss buying properties from the bank. In addition to getting pre-qualified, you must have your down payment and earnest money deposit before you even begin talking numbers with the bank.

Outside of the financials, nothing is more important than due diligence. You must have everything in order if you hope to land the deal. Banks are likely dealing with a number of investors at any given time; they don’t want to deal with anyone — nor do they have the time to — that isn’t prepared. That means you not only have to have the capital for a deal, but you need to make sure you dot every “I” and cross every “T” on every paper. In the event you miss a signature or can’t come up with the right credentials, the bank will simply move on to the next offer. Only once you have met all the criteria will the bank even consider looking your direction.

It should go without saying, but bulk REO properties are not the easiest real estate exit strategy. These types of deals are reserved for those with a lot of experience and capital on their side. It’s worth noting, however, that their difficulty isn’t for naught. Executed properly, bulk REO properties can be one of the most rewarding experiences in the real estate industry.