May 24, 2009

REO: Still an Opportunity

Its selling season once again. Inventory temporarily down and the number of buyers, at least in the bay area visibly increasing. Many buyers are looking into distressed homes, bargain hunters have buying up homes at an unprecedented rate. Actual sales have risen 91% year over a year.

The Wall, Street Journal reports: As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate. Lenders are stuck with foreclosed property and slashing prices or selling through auctions. Add ongoing job loss continuing beyond recovery and you can see why huge surpluses should continue to drive prices.

Realtytrac offers research insight into distressed markets. Here is what they had to say: Their U.S. Foreclosure Market Report: Realtytrac sees a 10 percent decrease from the previous month but still up 18 percent from January 2008. One in every 466 homes filed for foreclosure January.

“The extensive foreclosure efforts on the part of lenders and government agencies appear to have impacted the January numbers, particularly the Fannie Mae and Freddie Mac moratorium on all foreclosure sales that was extended through the end of January along with Florida’s voluntary 45-day freeze on all new foreclosure actions and scheduling of foreclosure sales that was announced at the beginning of December,” said James J. Saccacio, chief executive officer of RealtyTrac. The moratorium may have skewed the numbers lower for short period, but that is over now. Sounds like the expectation is likely we are in for another foreclosure surge.

There are three distinct REO strategies you can focus on:

The Notice of Default (NOD) list. With the NOD list, you are dealing with the owner. Ideally, the property will have a high equity, low Loan-to-Value ratio. Why? Because your profit is the difference between what the equity in the home is and the bank loan. Success here is based on the agents ability to bring bad news to a stressed client and still manage to keep the client in a positive framework. Finessing the relationship is key to keeping the client in the game and not in denial.

Short Sales
With a short sale you deal directly with the bank. The problem for the investor is the bank is not willing to sell a property considerably below current market value (another customer in denial). The second huge problem is that the banks are under staffed and over whelmed. Very difficult environment to work with, by the time you get an answer from the bank, its often the case that the buyer has left the scene.

Its expected that there will be a third big wave of foreclosures as the Fannie and Freddie moratorium passes. Financial institutions have ended their self-imposed foreclosure moratoriums and new foreclosure filings hit record highs. As the supply in that market swells, look for even further discounts to come. Housing markets slow down in the fall and winter, so distressed property prices should be even better.

The Math
It was clear to me that this is a very active market and that buyers were out to buy. I asked a real estate agent who specializes in REO in the bay area. I was interested in the cost benefit of selling distressed property. I could see sales volume on the rise and buyers were actively buying, but can you make money doing this.

I asked Gabrielle Dahms, a real estate agent involved with REO's in the Bay Area and here's what she had to say: After all, distressed property means low dollar volume. The volume of short sales and bank-owned properties throughout the San Francisco/Bay Area is staggering. Thousands of REOs are currently on the market, and many more short sales than that. Most of the short sales will become bank-owned because only a handful of them are approved short sales, those where the listing agent has gone through the trouble of negotiating with the bank pre-emptively. For more information about short sales you go to Gabrielle Dahm's Squidoo page.

Bank-owned properties, also referred to as REOs, can be spectacularly good deals. They can also be disasters waiting to happen.

Let’s first address the financial aspects. Generally speaking, REOs offer 20 to 50% discounts on properties in the market place. There are some hot areas in which REOs make less sense, however, because their prices are being driven up by multiple offers. Sometimes as many as 20! Clearly, there is no deal in that scenario.

Just as with regular properties for sale, location, condition, layout, neighborhood, and amenities make all the difference, especially for many of the first time homebuyers now flooding the market thanks to Obama’s First Time Home Buyer’s tax credit.

Getting into the REO market place requires guidance. Just like anything else, you can do it by yourself, but why would you? It’s like doing surgery on yourself and the outcome is a guess. That said, it pays to work with a real estate agent who is able to discern the banks’ approach, and who knows how much to bid, how to submit the offer (this is far beyond writing an offer on a contract form). The realtor also must be persistent, responsive and in contact with the bank.

Now back to the question as to whether REOs are bargains.

The short answer is, it’s an individual assessment that requires homework. An excellent and enthusiastic real estate agent on your side will do that homework and understand your motivation for wanting to own a particular property. Deep discounts are available, fixers can make for an attractive bargain, the sellers are motivated, special loan packages can make your buying experience much easier, Just as you, the buyer want to get a great value on the property in question, so does the bank want to get the highest return. Comps are still important. And of course, always factor in the time and cost of any repairs or remodeling for the property in question. Some REOs are likely to be good investments while others aren’t. Work with a realtor who presents a package solution, maybe even one who deals with buyers only because shooting from the hip is gambling, simply put.

Need More..

Interview the realtor you are going to work with and find out whether they will show you short sales and whether they know how to negotiate them, plus how they intend to represent you and what kind of protections they have in place for you in regards to the property you want to own. Also, ask them to explain their view of the local market to you, as well as how they will help you get the right home at the lowest price.

1. REO trade associations: that focus on the REO and default markets like REOMAC or National REO Brokers Association (NRBA), a group with about 800 members.
2. Industry Events: Five Star Default Servicing Conference to meet people in all aspects of default servicing.
3. Education: Spend time on realtytrac and forclosure,com., rismedia and Radar Logic
4. Check out the smaller institutions: Local and regional banks and credit unions, they may be more receptive to a short conversation.
5. Real Estate Agencies: Talk to agencies that are specializing in REO's.
6. Law firms: that specialize in legal matters for banks with large foreclosed portfolios.
7. Property Management Companies: Some management companies will handle REO property for lenders. If the property has tenants then they will collect rent and handle all management issues. Much of the time it is limited to lock down and trash out functions. Talk to national companies like Keystone Asset Management, Premier Asset Services and Midland Loan Services (Do a Google search)

Gabrielle Dahms can be reached at 415-200-7202 or

Thanks for Reading

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