How to Invest in REO Companies & Make Real Money

The terms "house foreclosures", "bank REOs" and "bank owned residential property" exude pain and many people cringe at the mention of them. These terms have been front page news across America over the past couple of years and unfortunately, will continue making headlines for the next 2-3 years, if not longer. With this, however, foreclosure property investment and specialized "REO companies" have become major components of the real estate investment industry -- creating tremendous opportunities for savvy investors.

"REO" is now common jargon among real estate investors. This acronym stands for "Real Estate Owned" properties. A loose definition is: homes that have been foreclosed upon or acquired by other means and become the property of the bank. REO properties are also referred to interchangeably as: bank owned residential property, bank REOs, house foreclosures, etc.

Today, at any point in time, there are several MILLION homes in various stages of foreclosure across America. As a result, REO COMPANIES (also known as "REO asset management companies") have been and will continue to crop up across the country over the coming several years. These are businesses solely dedicated to buying, repairing and reselling formerly bank owned residential property.

This article will explain perhaps the best & safest way for investors to take advantage of the tremendous profit potential offered by foreclosure property investment. This author believes that "passive" investment in professional REO asset management companies is by far the most secure and profitable way to participate in one of the best investment opportunities of this generation.

Things You'll Need

• Money to invest.

Instructions

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 $25000 - 50,000.

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!

3. 

   OK, let's say you've found an REO company 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 companies:

   Let's say that the REO company will raise $5,000,000 from silent partner investors like you and me.

   Once the $5,000,000 is raised, the REO company will typically go to a lending institution and initiate a short-term "bridge loan" for an additional amount of capital, by leveraging the $5,000,000 they have already raised. Let's say that this new loan is for an additional $10,000,000.

   The REO company now has a total of $15,000,000 in buying power with which to acquire REO properties from the banks and create an investment pool of homes.

   Next, the REO company will begin the process described in Steps 1-6 above. They will purchase "the cream of the crop" from the banks' REO property inventories until they reach their $15,000,000 spending limit. Now they have acquired their "investment pool" of homes. (e.g. 100 homes, averaging $150,000 each = $15,000,000.) * For our example this is 60% of market value - which is conservative.

   As a silent partner, you would now be invested in this pool of 100 REO homes. After Steps 1-6 above are executed and all of the 100 homes have been sold, the investment process is completed.

   * For this example, 60% of market value acquisition cost on our homes would translate to an average selling price of $250,000 each for a total of $25,000,000.

   From the sales proceeds, the REO company pays all business expenses incurred ($3,300,000 or 13% of sales for our example). Then, the REO company will repay the $10,000,000 loan + loan fees of $700,000 to their lender. Next, they will repay the silent partners their original $5,000,000 investment. The remainder is a net profit of $6,000,000 to be shared proportionately with the silent partners.

   $ 5,000,000 Silent partners' original investment
   + $10,000,000 Bridge loan amount
   --------------------
   $15,000,000 Total paid for 100 REO homes @ 60% market value

   $25,000,000 Total sales of 100 REO homes @ market value
   $ 3,300,000 Expenses (commissions, repairs, marketing, operations, etc.)
   - $10,000,000 Repayment of bridge loan principal
   - $ 700,000 Loan fees (10% APR, 6 months + 2 points origination)
   - $ 5,000,000 Repayment of silent partners' investment
   --------------------
   $ 6,000,000 NET PROFIT (to be shared with the silent investors)

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.

Tips & Warnings

• The key to success in making a foreclosure property investment is to partner with experienced REO companies. ALWAYS ask to see financial results on their previous investment "pools".

Resources

• FOR MORE INFORMATION click here
• CONTACT THE AUTHOR click here