| In Real Estate Investing 101, Part I we covered | | | | from the package. At the beginning of the period, |
| buying a house to resell for a short term profit, | | | | the buyer puts up a deposit (like earnest money) |
| while minimizing risk and making it happen fast. | | | | that is generally 10% - 15% of the package |
| We delved further into flipping in Real Estate | | | | purchase price. With the completed list of |
| Investing 201. In Real Estate Investing 101, Part II | | | | properties in hand, the 48 hour countdown to |
| we covered buying and holding property for long | | | | reject properties begins. They have seven days |
| term appreciation and wealth building. We also | | | | to complete ALL due diligence. After seven days |
| touched on class shifting to increase value. Real | | | | from the delivery of the order, the deposit goes |
| Estate Investing 202 continued on the Buy and | | | | hard. In other words, it is no longer refundable. |
| Hold theme and offered deeper insight into | | | | The transaction is generally closed about 15 days |
| making it profitable. In Real Estate Investing 203, | | | | from the delivery of the order to the buyer. |
| we looked at shifting property classes for highest | | | | Since these deals go from beginning to end in 15 |
| and best use, while increasing property value and | | | | days or so, there is simply not enough time for a |
| return. Each of these articles is available on Ezines. | | | | bank to go through the steps they would need to |
| This time, we are going to look at investing from | | | | finance the property purchase based on using the |
| a different perspective. The previous articles have | | | | property as security. However, after closing the |
| been about buying property "wholesale" and selling | | | | transaction, it may be possible to get a package |
| it "retail". But, there is another way to buy | | | | loan on 60% - 80% of the cost of the properties. |
| property that may be more efficient as well as | | | | However, this will complicate the disposal |
| more profitable. | | | | transactions and decrease profits. So, at closing |
| Want to make $50,000,000? | | | | the buyers need to have their funding in place, |
| Invest in REO Bulk Portfolios. The problem is that | | | | and it needs to not be dependant on the |
| this is out of reach for the VAST majority of real | | | | property. |
| estate investors. It requires a huge commitment | | | | Strategies for selling hundreds of properties |
| of time, energy, and (most importantly) cash. For | | | | For most buyers, holding the properties isn't the |
| a $50M profit, one should expect to spend a little | | | | option that they are looking for. Turning the |
| more than $100M. But, the result can be a fairly | | | | properties is the goal. Generally, there are a few |
| passive profit in the 40%-50% range within 6 | | | | different strategies that sellers use to dispose of |
| months to a year. | | | | the properties. These depend on both the |
| Decoding the alphabet soup | | | | properties and the type of buyers. |
| REO is industry jargon for Real Estate Owned. | | | | Wholesale sellers sell to other investors at a |
| This is property that has be foreclosed and | | | | discount from BPO. This allows them to minimize |
| repossessed by mortgage lenders. Some lenders | | | | further expenditure, while maximizing return for |
| retail the property through traditional channels. | | | | less than optimal properties. The properties can |
| They hire real estate agents to market the | | | | often be moved fairly quickly. One drawback is |
| properties along side any other area property. | | | | that more expensive properties are more difficult |
| The lenders usually have a few more hoops for | | | | to sell. Most retail investors are competing for the |
| buyers to jump through, and often aren't in the | | | | lower end of the market. |
| best of condition. These are the foreclosed | | | | Retail sellers spread their properties around to real |
| properties mentioned in the earlier articles. | | | | estate agents to list. These are often asset |
| Bulk REO portfolios are simply large groups of | | | | management companies and other similar business |
| properties that the mortgage lender doesn't want | | | | entities. These may be the properties that one |
| to take the time to market. By gathering these | | | | sees listed as "corporate owned" in the MLS. In |
| properties together, they are able to dispose of | | | | many markets, this can bring the maximum |
| them more efficiently. Since they often need to | | | | return, but is really only viable for the best of the |
| sell them quickly because of banking regulations, | | | | properties. And, it may take a long time. |
| they price them to move. They can be priced | | | | Properties that don't move through the other |
| any where from 40% to 70% of BPO or LTV. | | | | methods generally end up in auction. The biggest |
| Of these, pricing relative to BPO is much | | | | problem is that by the time get to auction; they |
| preferred. | | | | have been left sitting for many months or even |
| BPO is Broker Price Opinion. It is similar to an | | | | more than a year. Most properties will have |
| appraisal, but much simpler and less expensive. It | | | | degraded further from sitting disused. Even if |
| is also like a CMA or Comparative Market Analysis | | | | they haven't grown mold or been trashed by |
| that your local real estate agent might provide | | | | squatters, they have cost money to carry. That |
| when you are looking at buying or selling a home. | | | | may be directly if a loan was obtained to pull cash |
| Contrary to the name, a BPO may be issued by | | | | back out of the property, or indirectly through |
| a real estate agent that isn't licensed as a broker. | | | | lost opportunity costs. |
| When dealing with REO bulk portfolios, some | | | | So, how should we get rid of the properties? |
| sellers might not actually hire a broker or agent to | | | | I would recommend a combination of the |
| do the opinion. In cases where the properties are | | | | accepted methods, but with a twist. A good real |
| new (builder loan defaults and other similar | | | | estate agent will know which properties are likely |
| situations), they may rely on online valuations. This | | | | to sell without much hassle. This agent should also |
| is rare, though. The bottom line is that is the | | | | be able to give pricing scenarios that minimize |
| property carries a BPO of $200,000, and is being | | | | market time, while preserving at much margin as |
| sold at 50% in the package, it is costing the | | | | possible. So, feed this agent the cream of the |
| buyer $100,000. The BPO also takes into account | | | | properties, and price them aggressively to sell |
| the current condition of the property, including | | | | quickly. |
| repairs it may have needed at the time the BPO | | | | For the properties that aren't going to sell at retail, |
| was issued. | | | | mix them between wholesale and auction |
| LTV stands for Loan To Value. In this case, if the | | | | strategies. Surprisingly, auctions often deliver |
| property originally sold for $100,000, and the | | | | better prices for the seller, but if there are too |
| buyer put $5,000 down, the LTV would be 95%. | | | | many properties sold at once, the market is |
| So, in theory, if the property is being sold at 50% | | | | diluted. The same holds true for the properties |
| LTV, and the buyer is paying $100,000 for it, the | | | | that are to be sold wholesale to investors. |
| bank loan was about $200,000. The problem is | | | | Finally, properties that aren't likely to sell well |
| that we don't actually know what the property | | | | through the traditional channels might be best |
| might be worth. On one extreme, the defaulting | | | | disposed of through selling at very deep discounts |
| owner may have put 20% down. Sticking with | | | | to contractors or other vendors. These super |
| our $200,000 house, this means that they put up | | | | deals can really help to curry favor and move |
| $40,000, and the bank was on the hook for | | | | your other projects to the top of the scheduling |
| $160,000. At 50% LTV, the bulk buyer would be | | | | heap, as well as provide leverage for pricing |
| paying $80,000 for the property. At the other | | | | discounts. |
| end of the scale, the buyer might have put | | | | Innovative strategies for smaller investors |
| nothing down, and they might have overpaid for | | | | Because of the financial resources required to |
| the property. With the current real estate climate, | | | | complete one of these deals, they are generally |
| there is a possibility that the property devalued. | | | | restricted to only the highest level of individual |
| Further, when people aren't able to make their | | | | investors, as well as institutional investors. Actually |
| house payment, maintenance and repairs are | | | | completing the transaction, from start to finish |
| often deferred. So, we might be talking about a | | | | would normally take a bare minimum of $12M - |
| property that was purchased at $200,000 with a | | | | $13M. In addition to the $10M for the property, |
| 100% loan, but now is only worth $150,000. | | | | there would need to be a reserve for |
| Buying it at $100,000 (50% off of LTV) still would | | | | improvements, taxes, commissions and other |
| yield a profit, but not as much as buying at 50% | | | | transaction expenses. Almost all of this needed to |
| BPO, which would be $75,000. The biggest | | | | be effectively in cash (ok, not in cash, but in |
| problem with buying based on LTV is predictability. | | | | available capital. For a $100M bulk REO purchase, |
| We don't have as much of an idea about the | | | | one might expect to spend an additional $10M. |
| retail value of the property in its current condition. | | | | By turning around the property disposal and |
| Now for more of the basics | | | | beginning by auctioning off some of the properties |
| As previously mentioned, these are portfolios, and | | | | that aren't cherry picked off of the top, additional |
| are purchased in bulk. Calling up the local bank will | | | | cash is generated. This should reduce the |
| not get you a 50% deal on property. Bulk REO | | | | additional capital requirement. Basically, it would |
| portfolios are usually offered in packages starting | | | | fund the later stages of the transaction, as well |
| around $50,000,000. Most are sold in packages | | | | as spin off cash to begin to pay back the |
| priced at $100M to $500M per transaction. Some | | | | investor, or investors. |
| packages are $1B or more. There are a few | | | | A great strategy for smaller investors would be |
| consolidators that will sell smaller packages, but | | | | to form a group (I'm not a lawyer or accountant, |
| they are generally marked up as they are broken | | | | so I can't go into structure such as LLC, Corp, or |
| up. And, because these are broken up from | | | | partnership, etc.). Instead of focusing on |
| bigger packages, it is more difficult to specify | | | | ownership of individual properties, the investment |
| property types. Even the smaller packages | | | | could be treated as more of a passive |
| generally start around $10M. | | | | investment. Hire a good real estate professional, |
| With the more traditional packages, priced at or | | | | or have a major partner responsible to run the |
| above $100M, the buyer is able to custom order | | | | day-to-day operations of the properties. Aside |
| the properties. The buyer can request only | | | | from the marketing for the properties to be sold |
| properties within a certain geographic area, price | | | | retail or wholesale, and any renovations that are |
| range, and type (single family, attached, | | | | needed for any of the properties, there isn't |
| commercial, etc.). Keep in mind that we are talking | | | | much management that needs to be done. There |
| about a LOT of property. Even with a valuation | | | | will need to be marketing for the auctioned |
| of $300,000 each, at 50% ($150,000), there | | | | properties as well, but if those are disposed of |
| would be over 650 properties in a $100M bulk | | | | early in the transaction, that need will be |
| portfolio. Finding all of the properties to fit the | | | | minimized. |
| order would normally take a few counties, at | | | | While there may be increased expenses from |
| least. | | | | purchasing in smaller quantities, part of that may |
| When the order is placed, the compiler puts a | | | | be offset by being able to sell at higher prices. |
| package together. The package may be from a | | | | When selling 50 to 100 properties, there are many |
| single institution, or from multiple institutions. In | | | | more options than there are when selling 500 to |
| order to place an order, the buyer fills out an | | | | 1000 properties. When looking to dispose of 750 |
| order form, provides a Letter of Intent (LoI), and | | | | (nominal number) properties, more will have to be |
| completes a Non-Circumvent, Non-Disclosure | | | | auctioned and wholesaled simply to make the |
| Agreement (NCND). They also must get the | | | | remainder logistically possible. Aside from |
| information ready for their Proof of Funds (PoF) | | | | renovation resources (time, money and |
| letter that will be required by the selling financial | | | | contractors), marketing and selling properties can |
| institution. | | | | be expensive for a real estate agent. Hitting one |
| A Letter of Intent may also include the order | | | | with 300 properties might be counter productive. |
| information. However, primarily the LoI is just a | | | | However, having too many agents can make |
| document that states that the buyer wishes to | | | | logistics more difficult, as well as increase overall |
| purchase a bulk REO package. It may also outline | | | | marketing costs because of duplicate efforts. |
| what types of properties the buyers wishes to | | | | Building a relationship with the Bulk REO Portfolio |
| buy, otherwise that info will need to be provided | | | | sellers, by doing regular transactions (perhaps |
| on the order form. | | | | quarterly, or even monthly if properties can be |
| In order to maintain the security of the involved | | | | sold quickly enough) will often allow for leverage |
| brokers and principals, a Non-Circumvent, | | | | on brokerage fees. Another advantage of |
| Non-Disclosure Agreement is entered into by all of | | | | working regularly with the same REO sellers is |
| the parties. The NCND keeps the buyer's broker, | | | | that they may be able to bundle small orders with |
| the seller's broker and the principals from | | | | larger orders to lower the price in relation to REO. |
| disclosing sensitive information to outside parties, | | | | For $10M packages, many compilers are looking |
| as well as keeping them from going around | | | | to sell at 60% or even a little more. As the order |
| anyone involved in the agreement to complete | | | | size grows, the price may come down to 50% |
| future sales. | | | | for $100M deals, and even as low as 45% for |
| A PoF letter is exactly that proof of funds. These | | | | $1B packages. If a $10M order gets bundled to a |
| transactions are seldom done with mortgages in | | | | $100M order, the smaller order might get filled at |
| any recognizable format. We will go into why this | | | | 55%. That extra 5% discount can translate to |
| is the case in just a moment, but for now we will | | | | $500,000. |
| just say that the sales are done through a wire | | | | Research. Plan. Prepare. Remember the old adage |
| transfer. In effect, the sale is a cash sale. The | | | | that it takes money to make money. This holds |
| property is sold without encumbrances, and with a | | | | true in buying Bulk REO Portfolios as well. This |
| clear title. | | | | time it means it takes a LOT of money... to make |
| After the compiler gets the order together, there | | | | a LOT of money. Also, understand your own |
| is a short period, generally about 48 hours, during | | | | market and your own limitations. |
| which the buyer can reject specific properties | | | | |