How To Get Reo Business
What are REO Properties?
"REO" is an acronym that stands for "Real Estate Owned" properties. A loose definition is: homes that have been foreclosed upon and subsequently become the property of the foreclosing bank or lender. REO properties are also known as bank owned residential property, bank REOs, house foreclosures, etc. "REO companies" are businesses that deal exclusively with these investments. How To Get Reo Business
A New Industry Is Born:
Foreclosure has been front page news across America for the past couple of years. And this phenomenon is expected to continue unabated for the next 2-3 years, if not longer. And, as a result, foreclosure property investment has become an industry unto itself. This article is written to help investors understand the REO properties business and most importantly, the best way to profit from this tremendous opportunity: by investing in "specialized REO companies" .
Today, at any point in time, there are several MILLION homes in various stages of foreclosure. As a result, companies that are completely dedicated to the acquisition and resale of REO & bank owned residential property have been springing up all around the United States. These are called "REO companies" or "REO asset management companies".
Specialized REO Companies Emerge:
As foreclosure properties were just beginning to grab headlines, various investors and real estate professionals began to approach banks and lenders for their lists of bank REOs. When the banks supplied these lists, they also provided the selling prices that they would accept for those homes. There was some negotiation room at that time, but the banks weren't really willing to drop their prices too much below the amount of their original loans to the former homeowners. At the time, making a foreclosure property investment was basically an informal process done on a bank-by-bank, house-by-house basis.
However, that changed when foreclosures began to sweep across the US like a tidal wave. Banks and other lenders were literally being inundated with foreclosure properties every week and began to seek means to cut their losses and unload these bank REOs. This is because it costs money to hold onto a house with no payments coming in. The banks and other lenders still have to continue to pay fire insurance, maintenance, utilities and numerous other expenses on every one of their REO properties. As a result, they began to reduce their asking prices and became more willing to negotiate in order to unload their ever-increasing inventories -- thus, an industry was born.
So, in the American entrepreneurial spirit, specialized new companies began to take shape. These new "REO companies" deal only with "distressed" real estate, including bank owned residential property, homes in various stages of foreclosure and homes that are in jeopardy of foreclosure. An over-simplified description of their business model is that they acquire bank REOs well below the current market value, repair them to "move-in" condition and resell them as soon as possible at a profit.
There are a lot of businesses that like to consider themselves "REO asset management companies". However, most are not making any money. This is because they lack one or more of the following: experience, strong management, funding/cash flow, relationships with banks and lenders, networks of realtors, contractors and appraisers, etc. However, the REO companies that ARE profitable have ALL of these attributes and proven business processes as outlined below: How To Get Reo Business
What Successful REO Asset Management Companies Do:
1) They request lists of bank owned residential property from their bank and lender contacts. These lists are often provided to these companies before they are released to the general public because they typically will buy in bulk and can quickly reduce the inventory of bank REOs significantly.
2) The best REO asset management companies have networks of associates "on the ground" around the country that physically inspect each of the foreclosure homes individually. They create a file for each property, describing its condition and all relevant details regarding repairs that need to be made and any other pertinent issues (complete with photographs).
3) They have a network of appraisers who will provide a "BPO" (broker price opinion) for each of the REO properties based on its current market value in "as is" condition. This will help them formulate their purchase price offer to the bank.
4) Next, the REO companies will submit their offers to the banks for each bank owned residential property that they believe has good resale potential. NOTE: offers will typically be no greater than 50-65% of the calculated current market resale value of the home. (This is where they make their money!)
5) Upon bank approval, the bank REOs are purchased.
6) Then, the REO asset management companies send in their networks of building contractors to make any necessary repairs to get the former REO properties into "move-in" condition.
7) Finally, the homes are listed for sale via their affiliated real estate brokers around the country. The properties are then typically priced under current market value in order to resell the the former REO properties quickly.
And, believe it or not, some of these REO companies are so efficient that they can buy, repair and resell these home in an average of 4-6 months!
How To Invest In Successful REO Companies:
Professional REO asset management companies will set out to acquire what is called an "investment pool" of bank owned residential property. Typically, they will first seek out investors as "silent partners" to raise a certain amount of capital to help fund the pool. For an example, let's say they will raise $5,000,000. (This is money from investors like you and me.) The silent investors are not involved in the day-to-day management of the pool. It is a "passive" investment for them.
Once the $5,000,000 is raised from investors, the REO companies will usually go to their lending institution(s) and initiate a new loan for an additional amount of capital -- leveraging the $5,000,000 of investor money that they have raised. Let's say that is another $10,000,000. Now, they have a total of $15,000,000 in buying power with which to acquire bank REOs for their investment pool of homes.
Next, the REO companies will begin the processes listed above in Steps 1-7. They will purchase the "cream of the crop" from the bank REO lists until they reach their $15,000,000 limit. Now they have acquired their pool of homes. (Let's say 100 homes, averaging $150,000 each.)
As an investor, you would now be invested in this pool of REO properties. When all 100 homes in the pool are finally sold (often within 4-6 months), the pool is closed. At that time, the $10,000,000 loan is repaid and the investors are repaid their original investments (totalling $5,000,000). Finally, net profits are calculated and investors are paid their pro-rated share of the profit. How To Get Reo Business
How To Get Reo Business - Why You Should Invest in REO Companies & REO Properties
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