Things You'll Need:
- Money to invest.
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Step 1
The first thing you will need to invest in REO companies is: (you guessed it!) MONEY TO INVEST. The good news is that you won't need hundreds of thousands of dollars if you follow the directions below. However, you WILL need something in the neighborhood of $50,000.
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Step 2
Next, you need to find reputable REO companies with experienced management teams and track records of success (meaning "profitability" for their investors).
There are a number of so-called REO companies out there, but very few are making any money at it. So, investor beware! The companies that ARE making money, have proven business models and established relationships with banks, lenders, real estate agents, building contractors, appraisers, etc. THESE are the companies that you want to pursue for your foreclosure property investment and they are definitely worth your due diligence efforts to find. (For assistance, click on the link in the Resources Section below titled: "CONTACT THE AUTHOR".)
Here's what the most successful REO companies do:
A) They contact lenders for their lists of bank owned residential property (often before they are released to the general public).
B) They have associates "on the ground" throughout the U.S. that physically inspect each of these bank REOs. They create a file describing the condition of each home including all relevant details and especially repairs that need to be made, complete with photos.
C) These REO companies have affiliated appraisers and real estate brokers throughout the country who provide "BPO's" (broker price opinions) for each home based on current market price valuation in "as is" condition. They also provide recommendations on the resale potential of each potential foreclosure property investment.
D) Next, the REO companies submit offers to the banks for each of their bank REOs that are believed to have solid resale potential. NOTE: offers will typically be no more than 50-65% of the calculated current market resale value of the home. (This is how they make their money!)
E) Upon bank approval, the REO properties are purchased.
F) Next, they will send in their network of building contractors to make any necessary repairs to get each home into "move-in" condition.
G) Finally, the REO companies will list each formerly bank owned residential property for sale via their affiliated network of real estate agents. By design, resale home pricing is almost always "under market" in order to sell the homes very quickly. Believe it not, some of these REO companies are so efficient that can buy, repair and resell these homes in an average of 4-6 months! -
Step 3
OK, let's say you've found one or two solid REO companies to invest with. You've done your "due diligence" and checked out their track record. Here's what you can expect when investing with professional REO asset management companies:
Typically, REO companies will set out to raise a certain amount of money. Let's say $5,000,000. (This money comes from outside investors like me an you.) Once this capital is raised, they will go to their lenders and initiate a loan for an additional amount of capital. (Let's say $10,000,000.) Now the REO company has a total of $15,000,000 in buying power to purchase bank REOs with.
Next, the company will request lists of bank owned residential properties from their lenders and bank contacts, then perform the preliminary activities explained in Step 2 above. They will then buy the "cream of the crop" from the bank owned property lists until they reach their $15,000,000 limit. Now they have a "pool" of REO homes. (Let's say 100 homes, averaging $150,000 each.) This investment pool of homes becomes a foreclosure property investment product.
As an investor, you or I can invest in an "investment pool" of REO homes being offered by one of the REO companies (typically as a silent partner). Then, when all 100 homes in the pool are ultimately sold (typically within 4-6 months), the pool is closed. At that time, the lenders are paid back their $10,000,000 loan. Next, net profits are calculated and the investors (me and you) are paid their pro-rated share of the profits plus their original investment in the pool. And the returns can be very lucrative indeed! -
Step 4
As I said at the beginning of this article:
This author believes that "passive" investment in professional REO companies as a silent partner is by far the most secure and profitable way to participate in one of the best investment opportunities of this generation.
FOR MORE INFORMATION about investing in REO companies, click on the links in the Resources Section below.
Comments
langleycornwell said
on 5/29/2009 Excellent article on investing in REO properties. Easy to understand, thanks. 5*s.
westernmom said
on 5/28/2009 We just had an REO company move into a suite of offices near mine. I have been talking to these young guys and they have talking to me about investing. I appreciate this information to help me! 5*
whoodo said
on 5/22/2009 Although I am not close to having the capital to purchase REO properties, this was still a very informative and easy to follow artic.e. 5 stars.
cclofmead said
on 5/22/2009 Investing in REO properties sound like a great idea!! 5*
athome said
on 5/18/2009 Now if I only had the money to Investment With REO Companies.