How to buy REOs – REOs versus Non-performing Notes

How to buy REOs - Comparing REOs vs. Nonperforming Notes

It’s a tough choice, I know.

And I’m sure some people look at nonperforming notes and
say “why would I EVER want to own paper when I can own the real
estate for soooo cheap?!”

Well, yes. It can be cheap.

Well, yes. It is real property as opposed to a debt
obligation.

And yes, you can get rid of it pretty quickly if you
price it right.

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* * * So why shouldn’t everyone drop everything they’re
doing and chase REOs? * * *

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1.    Valuation Risk.

You’ve gotta nail the home value,
and take good care of evaluating interior condition
here. It’s one thing to find yourself with a lemon
(e.g. loan), where you have several ways to turn the
lemon into lemonade (e.g. get borrower to make
payments). It’s quite another when you have a vacant
property, to try squeezing sweet juice out of this
lemon. Can obviously be done, but you should know your
area values and your interior condition much better when
buying REOS than when you’re buying notes.

2.    Purchase Risk.

They can be a time waster until you
nail your sources! Usually 2-5 brokers deep in a
chain, at least one ubiquitous “attorney” who is a
fraud and huckster claiming he or she is (not has, but
“is”!) a “mandate” for someone else.

3.    Deal Risk.

A friend of mine just spent 2 months
chasing one deal of 16 REOs. He just closed on 1 of
them. All the others were pulled by the seller as the
agents (all but 1 were listed) got the properties into
contract. Or they were lost to a competitor since
there were 3 brokers in between him and the seller.
The one property not pulled was … you guessed it … the
one that wasn’t already listed. The “loss ratio” on
note pools – in other words the rate at which notes
are pulled from a specific pool – aren’t as high by
any means. (One day, ask me about the west coast pool
that we lost!)

4.    Discount Risk.

The discounts that you typically
hear on REOs may not be quite as juicy as you’ve been
made to believe. Unlike a “sweet” note deal that
closes in the 30%’s, REO prices in that range are
typically a pipedream. But you’ll hear pricing that
low on a regular basis.

I’m not panning REOs by any means.

Just jump in with your eyes open, and don’t get
fooled by all the hype that you’re reading about
the REO deals to be had right now.

Talk soon,

Dean

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