There has been a lot of noise in the news about bulk buying of single family REOs, as well as a growing shortage in inventory, but are real estate investors needlessly fighting over the most overpriced scraps when there are much bigger and easier profits to be had?
Many investors may be diversifying into note investing and commercial properties, or even trying to chase multifamily apartment buildings while mortgage interest rates are low and rents are rising. However, according to the December U.S. Banks REO report from DistressedPro.com, multifamily REO makes up just over 3% of REOs, just ahead of farmland. In fact, while residential REOs maybe be weighing down banks with over $10 billion in idle assets at 27% of REOs, this pales in comparison to the more than $15 billion or 40% plus of REOs that are made up of construction REOs.
These construction REO properties are a major headache for banks and mortgage lenders. Few have had the guts to chase them or even realize how much potential they have, and cities and local governments badly want partially finished eyesores completed and providing the big tax revenues they promised.
This presents a unique opportunity for investors looking for the biggest spreads. With less competition for these construction REOs, cities and counties likely to assist with credits or other incentives to see projects finished and banks most desperate to unload these sour assets investors do not just have more negotiation power but can get far more attractive overall deals than on other types of distressed properties.
U.S. banks aren’t done getting hit on construction loans either. Builders, hotel brands, and other wheeler-and-dealers are still landing in trouble, just like in the current $200 million lawsuit between Eden Roc in Miami Beach and Marriott.
However, with a rebound definitely under way in many parts of the country and in multiple niches, there is massive opportunity for those who can step in and complete all types of construction projects. Hotels in Florida have been getting sold out like crazy so far this year. One Lennar exec landed a 23% raise last year, and luxury home activity is picking up.
Yes, taking down these construction REOs will take cash or great leverage, but for those with vision and ambition it is clear there is a goldmine awaiting and the opportunity to see massive wealth building in a short period of time.
Of course, walking into most big banks or calling their 800 numbers isn’t going to get investors who are interested in these deals very far. Instead investors ought to be looking for the tech advantage through new software programs to help them identify these opportunities as well as seeking out contacts with smaller regional and local banking institutions.