REO’S An Untapped Source Of Wealth

By Michael Webster

www.michaelwebster.net

We as investors take a different view than do many real estate folks. We consider an REO property to be an untapped source of wealth. An REO as you know is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and has had no luck getting bids. Because the property was not bid on, the bank then became the owner of the property.

Banks are often not in the real estate business and so don't want to keep the REO any longer than necessary. You might say they are a special category of "don't wanter". This makes it a great opportunity for an investor and their real estate person they are working with.  Yes, it’s true you may have to write up many offers that's why many folks in the real estate business don't want to take the time to do the work on the offers. But that is one of the keys why it makes money. Not everybody is welling to do it... Times are also changing it is fast becoming a buyers market. If you shift gears now ahead of the curve you can make money with us. It's true not every REO is a good deal, but when you look at many REO's you’ll commonly find that there is a lot of money to be made.

With my guiding you, you will avoid wasting hundreds of hours on unprofitable offers.

The bad news for the banks is that there were no bids placed on the home. That means that the bank is stuck owning the property. Now the bank should be anxious to get rid of the property.

Another key is to know how the banks think and understand there dilemma. We as Investors are interested in REO’s because they often can be purchased for a fraction of their market value. But to get the deals you must understand exactly how to zero in on the best opportunities.

To make the killer profits you must know how to identify profitable properties, how to negotiate with banks and how to protect your interest.

My job will be to show you how to make the most

Amount of money in the least amount of time writing up offers.

In the world of real estate there are many, many types of properties that people can buy. The majority of the time people hire a real estate agent to help them buy a property that is listed on the MLS.

More astute bargain hunters or folks like us look at houses that are either in foreclosure or are owned by a bank or loan company.

Banks hate REO's. That's why it is often possible for an investor to buy an REO at below market value. Sometimes way below value. Under certain conditions many banks will take large losses just to get rid of their REO's.

As more and more properties become REO's and more are everyday and we expect that trend to continue for the next 2 years or so the banks books start showing bank liabilities. REO's are liabilities to banks.

An REO on a bank's balance sheet is a liability rather than an asset.  For banks to pass there regular audits they must have a positive asset to liability rate. If they have too many REO's on the books they will loose there ability to get the loans they need to stay in business and get the money from the feds that they need.  
Every month that the REO remains unsold, the bank loses money.  Banks have to also answer to the board of directors and the stock holders both do not like REO's on the bank's books. Many bank owned properties managers have lost there job just for having too many REO's.
Knowing this information and knowing how to negotiate with the bankers is what makes the difference and gives us the edge.
Here are some more reasons that a bank would sell an REO to us at a deep discount:

The bank has received a large cash settlement from their Private Mortgage Insurance Company. Private Mortgage Insurance is also known as PMI. PMI is insurance that covers the bank for losses when it must foreclose upon a homeowner and it not able to sell the property for the

amount still owing on the mortgage loan. PMI does not cover the full exposure of the lender. PMI covers the top slice of the loan, maybe 20% plus some fees. In the case of a 90% loan, then PMI usually covers 10% of the loan amount. In order for the bank to receive the PMI coverage it must manage the default to its completion - the foreclosure sale. Just know that unless you are paying 100% of what is owed the bank, they will need to get the PMI Company to concur with a decision to sell. Otherwise the bank could lose their opportunity to file the insurance claim. In the rarest of instances a lender may decide to forego the PMI claim.

So, depending upon what is bid at the auction, PMI will make the bank a full or partial settlement. This settlement helps offset any loss of money the bank may have when it sells the REO at a discount.

With most REO's, the banks are willing to take a loss even if the PMI settlement does not cover them fully. This loss is viewed by banks as the cost of doing business and is factored into their operating expenses.

For example, the bank is foreclosing on a property and has given their attorney instructions to start the bidding at $140,000 (their credit bid). No one shows up to bid on the property and the bank ends up with it.

Since the bank has followed the bidding instructions of the PMI Company, it will receive a cash settlement of about $14,000 and possibly more, depending upon the terms of the original mortgage insurance premium. On bigger deals the amount is more.

This means that the moment the auction is over it can now sell the property to you for $126,000, because it will get $14,000 from the PMI Company.

Since many banks are willing to take a loss on REO's, there is a good chance that you can get the property at an even deeper discount.

 As stated earlier banks are regulated by the federal government. The Feds penalize banks for having too many REO’s. A bank with a lot of REO’s may not be able to borrow money from the Federal Reserve or may have to pay a higher interest rate on the money that the Federal Reserve loans it. Banks need to borrow money from the Federal Reserve in order to operate.

 From the feds point of view an above average number of REO’s are a sign that the bank has been making bad loans. If a bank makes enough bad loans it could be forced out of business. The U.S government insures these banks through the FDIC and keeps a close eye on their operations.

This means that every bank has a strong incentive to minimize the number of REO’s in its inventory. Many so called experts are predicting REO's are on the raise and over the next couple of years to be more REO's on the market than ever before. This to those in the know means great profits can be had.

Banks are not organized to manage real estate. In good or bad economic times many banks don't even have an REO department. When a small lender gets an REO, it assigns the task of disposing of the property to a high ranking manager, such as a department manager or a regional manager.

The REO's are dropped into this manager's lap on top of all other normal duties. He or she does not get paid more money to deal with REO’s. This manager wants to get rid of the property as fast as possible. This makes it feasible for an investor who understands the process to make the bank a low offer and have it accepted.

All banks differ from one another; however the large banks and loan companies will have an entire department that is solely for REO sales.

Depending on whether the bank that you are purchasing the property from has its own REO department will largely affect the time it takes for them to look through the offer.

A large bank will have a number of people who are involved in the decision making process, of whether or not to accept an offer. It is not unusual for 3 or 4 people to look through your offer and give their opinion. Generally you may expect the bank to take a week to consider an offer.

Banks sometimes own mortgages on out of state properties. When a property is foreclosed upon and a bank ends up with an REO that is located in another state, it makes it doubly difficult for the bank to make decisions about the sale of the property.

In most cases it doesn't make financial sense to have a bank representative travel to an out of state property, assess its condition, then hire contractors, oversee fix-up and then list the property for sale with a real estate broker. As you might guess some of your best REO opportunities

will be with local properties that are owned by banks located in other states. That's where we come in we have relationships with many banks around the country. Some of which have REO's in your area.

The REO will have carrying costs associated with the property. These include property taxes, water and sewer bills, insurance bills and electricity bills. If the property is a condominium, there will be condominium fees. If it

is a townhouse, there will be homeowner's association fees.

In addition to carrying costs, there are seasonal maintenance costs. The property must be winterized in the colder months. In the milder months, the lawn has to be cut and the shrubs trimmed.

Banks want to avoid these responsibilities whenever possible and so have incentive for a quick sale.

The REO must be put into marketable condition. Banks are not set up to deal with the renovation of a property. They run the risk of paying too much for repairs and end up over-improving the property, or worse, under improving the property.

Most people don't know that often the bank will wait until there is a contract and then negotiate with a buyer before they have needed repairs done. This often results in the property sitting unsold for months, because 90% of those buying as owner occupants want a property that is in move-in condition.

Carrying costs mount up, making the bank more and more anxious to sell. The bank must hire a real estate agent to market the property. This will cost the bank around 6% of the total sales price. In cases where the bank is willing to sell directly to an investor, it can save the six percent commission that a real estate agent will charge.

As an investor we must remember these and other reasons and use them to our advantage when negotiating an REO purchase. It is plain to see why banks do not want their REO's and will often sell them at deep discounts.

The bank will be willing to sell the property at a deep discount, because they know that the property needs work. It is not unheard of for investors to get REOs that are in poor condition for less than 50% of their market value. For the investor who understands the options and have bank contacts as we do very large profits are possible for us and you.

Some advantages of Buying Bank REO Properties

All liens against the property are removed once it becomes an REO, and taxes are paid.

Unlike properties at foreclosure auction, REO's can be inspected prior to contract, and are listed with real estate agents.

While many foreclosures are often in deplorable condition, REO’s are sometimes restored to at least a readily salable condition by the lending bank.

The bank or lending institution that owns the property will often offer you better financing on an REO purchase than they would on an ordinary mortgage loan.

The bank or lender that owns the property will often provide an allowance for certain repairs.

You can save money in your title search if you use the same title company that the lender used during foreclosure. They will often discount the cost up to as much as 100%!

This is just a few of the many reasons buying REO's is smart.
To learn more about me than you'll ever want to know go to: www.michaelwebster.net  or to: www.lagunajournal.com

If you have some interest in a property youn should ask the following questions:


1. Note Balance $____________
2. Any repairs needed, and estimate of costs?
3. Any recent title search with results?
4. Any redemption period pending?
5. Fair Market value?
6. Asking price?
7. Any recent inspections on property?
8. Any recent appraisals?
9. What was the minimum bid at the forecloser auction sale?
10. Maintenance costs (per year).
11.Monthy rental cost in the area of like property.
12. What are all yearly taxes?
13. Any landscaping needed?
14. Utility costs (past year) 
15. All HOA, Mello Roos
16. All Insurance costs

17. How many days on the market?

18. Have there been any offers, if yes then how much?

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