Doing a Bulk REO deal not only gives you access to bigger discounts but it also reduces your competition on the really good deals.
While the average REO investors are fighting for single properties the Bulk deals are going unnoticed.
This presents the perfect opportunity to find amazing discounts.
In this article you will learn:
Before we get into the nitty-gritty of investing in Bulk REO, lets first cover a few concepts and principles that are unique to bulk REO.
What is Bulk REO?
When we’re talking about bulk REO, what we’re talking about is packages of bank-owned properties.
Bulk REO is typically sold by a bank when they have a group of similar foreclosure properties that need to be sold.
Sometimes a bulk REO package will become available because the bank acquired a failed bank or acquired some other package of loans that were not performing which they then had to foreclosed upon.
You might find bulk REO packages simply because they are lower-cost properties and sometimes you find bulk REO packages that have been put together because the bank needs to recapitalize quickly.
Difference between bulk REO and real estate foreclosures.
So there is no difference between bulk REO and real estate foreclosures. REO is an acronym for “Real Estate Owned” which is been shortened from the acronym “Other Real Estate Owned” or OREO which refers to a line item on a banks quarterly financial report. Another real estate owned scenario, is property acquired through the foreclosure process by the bank.
So bulk REO is simply a package of foreclosed properties. I have seen and been involved in the sale of pools of both residential as well as commercial REO, usually small balance commercial REO in a specific narrow geography.
How to Find Bulk REO
At the core, there’s really only one way to find bulk REO packages and that is direct from lenders. Bulk REO packages aren’t typically listed with a single broker hence the bulk in bulk REO.
Banks list REO with agents when they’re looking to get the most money for the asset.
They sell bulk REO when they’re looking to get money, as fast as possible, for the assets and that is the primary difference.
If you want to maximize your return as a foreclosing Bank on the REO then you sell it individually at market rates with traditional market timing.
If you need to recapitalise quickly or if you have pools of assets where time is more important than the ultimate end value then you sell the assets in bulk and that is how we get bulk REO.
The Long Arduous Way
The biggest mistake that most people make when they’re trying to get bulk REO deals is using what I called the bottom-up approach which means that they will go and identify individual properties and then try to find the lender or a decision maker and leverage their way into an opportunity at bulk REO from the bottom up.
This approach rarely works. It’s incredibly time-consuming and you’ll find most of the time you’re running into early and immediate roadblocks.
What you need to do if you’re going to find bulk REO packages is you need to identify:
- Lenders who you believe have the types of assets that you’re after.
- Decision makers at those lenders who are responsible for the assets and ultimately the bulk REO sale.
Fortunately, all the information that you need in order to identify which banks have pools of REO is free and available on the internet. in fact, we offer a free mini video training course that walks you through exactly what you need to do.
The trouble with this approach is twofold, first compared to BankProspector all the information spread across FDIC website. BankProspect today, by contrast, is available and updated on a nightly basis, in fact, our data is available 45 to 60 days before it’s available from the FDIC.
The second challenge is that the data from the FDIC website is note built for the purpose of selling Bulk REO. There’s quite a bit of work that you have to do to get all the information you need in order to put a deal together. Thankfully, BankProspector does all of that work for you but we’ll get to that in a minute.
It’s not enough to just identify the sellers because as I said earlier you need to do these deals directly with people. That means that you need to identify decision-makers who are responsible for selling bulk REO. Titles for decision makers in these roles might include special assets manager, workout officer, credit risk officer, real estate officer, vice president of Real Estate or even vp’s of REO. There’s no hard-and-fast rule to what the title of the position is for the person who decides to sell bulk REO for a bank.
- Step 1 is to identify the lenders who have bulk REO potential.
- Step 2 is to identify the decision-makers at those institutions who can sell bulk REO.
- Step 3 is to implement a prospecting system that will allow you to contact a number of them those decision-makers at scale.
This usually means a combination of phone calls, emails, and reaching out through other networks like LinkedIn. Don’t, however, underestimate the power of meeting bank representatives for bulk REO sales in person at networking events but we can talk more about that later.
Once you find a decision maker who’s willing to play ball on bulk Reo, the first thing they’ll probably send you is his “tape”. A tape is industry lingo for a spreadsheet, it is simply a list of assets on a spreadsheet that will include information like county, fair market value, last appraisal date, BPO or broker price opinion and other relevant data.
Remember when you’re dealing with banks and REO these are pools of unwanted assets and they own the notes or loans on many thousands of homes so in order to manage all this and have a real view of the assets they’re processing, they put them into a spreadsheet and that spreadsheet is commonly referred to as a tape. Don’t let the simple presentation fool you. Just because the REO is a simple line item in a spreadsheet doesn’t diminish its value.
The Easy Way with BankProspector
BankProspector makes finding bulk REO deals significantly easier.
With BankProspector, you can identify the most likely sellers which are your local and regional lenders, as well as contacts for those sellers in just a few clicks. With BankProspector’s advanced search feature for example you could easily pull up a list of all of the banks in your state, surrounding states or whatever your target states are with a minimum value of residential REO ,say $1,000,000, add them to your target list and then have a list of contacts usually just within minutes, instead of months.
How to Buy bulk REO
There are a lot of ways to make money with bulk REO and perhaps that’s why it’s so exciting.
Now to be sure in times of distress there are more bulk REO packages to be had but a simple look at the data today will show you that thousands of banks together have nearly a hundred billion dollars in REO so the opportunity is real and still exists today regardless of the market.
One of the most common ways to make money with bulk REO is to simply find it for an institutional investor. While there aren’t many of us who can take down a package of 50 homes with the stroke of a pen, there are many funds including private equity, hedge funds in family investment offices that do have that ability.
However what they don’t typically have the ability to do is the prospecting that’s required for the acquisition. As is the case with most deals in real estate, the most important and most profitable role in bulk REO is finding the packages for sale. If you can do this then the hedge funds, private equity funds and family investment offices will be very happy to hear from you.
In fact, there’s so much capital chasing these kinds of deals that you could make a living simply identifying packages in referring them to the end buyers.
A slightly more sophisticated approach would be to buy bulk REO packages, identify that one you would like to own and then pricing the bulk REO for your buyers such that their investment pays for some or all of your acquisition including those areas from the bulk REO package that you want to keep.
Bulk REO Due Diligence
Doing the due diligence on bulk REO requires that you have a process.
When you’re buying a single home, property or foreclosure you have only one building to look at, only one title report, one market etc.
When you’re doing your due diligence on Bulk REO that means that you’re going to have to evaluate a lot of properties. And you’re going to have to do it quickly.
The reason you’re going to have to do it quickly is because if a bank is offering a bulk REO package it’s because they’re looking to recapitalize those assets as soon as possible. Bulk REO deals typically come with a short time frame within which you will need to be up to make your decision submit your offer complete your due diligence get funded and closed.
Fortunately with the internet, there are a lot of ways even automated ways that we can very quickly get a lot of our due diligence done. One resource for the fast and inexpensive title due diligence is ProTitle and you should check out my interview with them over here. Fortunately when we’re talking about REO we rarely have title issues and that’s because the bank and their legal counsel has had to clean up any outstanding title issues in order for them to take position of the property.
That means that it is extremely rare to find Municipal, workman’s, or other mortgage liens on any REO property. The very fact that the bank foreclosed on the property that act in and of itself typically will clear title. And banks do not carry unless they’re doing something wrong.
In addition to quick title clearing and understanding of the value the present value and the market conditions for each asset. Some great resources for that include Trulia in Zillow to name a couple of free resources but there is a number a growing number of online value estimating tools both paid and free.
Google Earth and Google Street View for example or two quick and easy ways to get a general sense of what the neighborhood is like and what other types of properties are around the asset.
One of the things that I’ve done in the past when I have a large number of Bank assets to deal with at once is to contact local brokers who are always very willing to do drive-bys, take photos and do other casual inspections. Prepare to pay them for their time and recognise that it’s well worth it to get a professional set of eyes on an asset that you may never see and will only own for a short time if it all.
How to Work Through a Bulk REO Tape
When you’re working through a bulk REO tape, what I recommend you do is retain the original tape as the master.
That means that you will not make any changes to it. You’ll make a copy of it and then you will augment and add data to your copy rather than to the original document.
This helps ensure that you don’t have data loss or mistakes, that allows you to cross-check your information on the bulk REO package.
I recommend that you create additional columns for notes and values that are your own on that spreadsheet so that you’re able to communicate these to your and buyer effectively. Remember it’s not enough that you find the package you then have to make that attractive enough to your investor to buy from you.
(an example of a tape in Google sheets)
I recommend that you use Google Sheets and that you share your document only with specific individuals or maybe your buyers and allow them only view and comment permissions this ensures that when they are evaluating they don’t corrupt your data.
How to Negotiate Bulk REO Deals
The price of a bulk REO package is negotiable. In my experience, the most important thing to a lender in a bulk REO transaction is that you are able to perform. Banks don’t like surprises.
They will often offer short looks at the tape at the end of which you will have to close. You should have some idea of who your investors will be and be confident that they’re capable of closing.
There’s nothing that will blow up a relationship with a potential seller who could bring you deals year after year, like failing to perform.
Proof of funds
Proof of funds or a POF is probably the most overused term in foreclosures notes or bulk REO. There are a lot of gurus out there who will claim that in order to do a deal you need a proof of funds letter. Neither I, nor any of the experts whom I’ve worked with, including leading industry professionals who have been at this for decades, have ever supplied or had supplied to them a proof of funds letter this is baloney.
If I’m representing the bank, as I have in hundreds of transactions, the proof of funds that I take is the deposit in the form of a wire or cashier’s check from you at the time that you submit your offer. Sometimes these funds are refundable, sometimes they are not just as in any other real estate transaction. This is a matter of negotiation typically you put down a binder, that binder will get you a look at the tape and at the end of your look,Could be anywhere from 15 to 45 days, you will have to close.
I have not once ever asked for a letter showing me that a buyer or investor had some amount of money in the bank. Or that they had a loan or a loan commitment for the amount. Typically, if you’re going to buy a bulk REO package after you put down your binder or earnest money deposit, you’ll have a period within which to evaluate the assets and then you will close.
That means there’s no mortgage or finance or other funding contingency and so why should there be a proof of funds letter if there are no contingencies? You put down a hard money deposit, that deposit is liquidated if you fail to perform and otherwise you close on the specified day. Don’t believe the proof of funds fallacy it is not necessary, in fact I’ve never seen one being used in an actual transaction.
How to Finance Bulk REO
Want to learn how to finance a package of Bulk REO? Well, I’m here to tell you that this should be the first thing that you do. A bank will not give you a loan to buy their bulk REO.
Traditional lenders will not give you a loan to buy bulk REO. You are going to need other types of capital, that could mean other people’s money and outside investment, that could mean a credit line but it won’t be any mortgage.
You cannot get a mortgage on a bulk REO package.I have seen small packages of bulk REO with properties in Cleveland worth as little as $5,000 to $10,000 or Michigan in a similar or lower range and I’ve seen bulk REO packages with pools of small commercial properties throughout New England ranging from $50,000 to $500,000 or more per property. There are no rules about what a bulk REO package looks like about how you make an offer on it or about how you make money with it in the end.
The only rule that I would leave with you is that if you’re going to pursue bulk REO first make sure you set up a system for yourself for identifying the lenders and decision-makers and then for contacting them at scale in order to find the deals.
I hope you’ll look at BankProspector to help you with this. The second rule that I would say is that you should understand that once you engage a lender and you begin the journey of evaluating a package for sale you must be prepared to close. You do not want to be the guy or gal who fails to perform for a lender, bankers move around from bank to bank and your name, you’ll find, will become one of your most important asset. The best way to keep that good name is by being able to perform.
Here are two links that you will find helpful as you continue to look for bulk REO deals.