By: Kenny Rushing
Buying and selling bulk REO’s is among the hottest real estate niches in the country right now. But this business is only a few years old, so the fact is not many people know how this business works yet.
Lucky for you, I have been one of the few investors in the country who has actually closed bulk REO deals and play in this market everyday. I like doing $1 deals with Bulk REO’s just as much as I do when buying and selling single REO homes.
However, I like doing bulk REO deals more because the profit potentials are much bigger.
In addition, the bulk REO business is far less competitive than buying single REO homes from REO agents. Most investors don’t understand how to make money with Bulk REO’s, or they think buying bulk REO packages are too risky.
“Isn’t Bulk REO Investing Too Risky?”
When you buy a pool of bulk REO assets from a bank, you are buying “sight unseen”. This is enough to scare away most traditional investors. Don’t worry, you’re about to discover how to take the risk out of buying Bulk REO’s.
Traditionally, most real estate investors are used to going out and physically inspecting properties themselves. I refer to these people as “touch & feel” investors. However, when you buy Bulk REO homes from banks, “touching and feeling” these homes are impossible to do when you’re contracting to buy 30-500 homes or more scattered across the country. Therefore, you have to depend on others to go out in each local market and inspect the properties for you.
I have been active doing Bulk REO deals for 15 months now. Traditionally, I am a “touch and feel” type of investor like many of my peers and it was hard for me to adapt to buying properties “sight unseen” and not inspecting a property before I contracted to buy. For that reason alone, I had no choice but to develop a system that would allow me to buy and sell Bulk REO deals without ever looking at a single property but still feel comfortable along the way.
“Why Are Banks Selling Off Bulk REOs?”
Due to the U.S. economic meltdown and foreclosure crisis, banks across the country are failing. This has created a unique opportunity to buy properties directly from banks like never before. Today, banks all across America have BILLIONS of dollars in defaulted loans. As I write this report, there are over 1,905,723 foreclosure filings right now. If foreclosure filings continue at this pace we would have exceeded the 3 million foreclosure filings the U.S had in 2008.
When a borrower is in default of their mortgage note, the bank will move to foreclose on their home. The mortgage note is now considered non- performing and becomes a liability on the banks balance sheets. Immediately the bank will hire an attorney to begin the foreclosure process.
In addition to attorney’s fees, if the homeowner in default fails to pay the hazardous insurance policy, the property taxes and neglects to maintain the property, the bank will have to step in and pay those expenses as well.
Some banks have thousands of these properties and the financial burden is enormous. At this point the bank wants nothing more but to get rid of this money pit!
The timeline to foreclose on a property will depend on if the property is located in a judiciary or non-judiciary State as we discussed in the Foreclosure Frenzy article. In a non-judiciary State, the process to foreclose is much faster and can be done in 2-3 months, while in a judiciary State the process normally takes about 6-12 months.
Once the court has issued a “Notice of Judgment” in a judiciary State or a “Notice of Trustee Sale” in a non-judiciary State, the bank will move to sell the property at the foreclosure auction. The foreclosure auction is normally handled by the local Sheriff’s office. At auction, an opening bid on the property is set by the foreclosing lender. This opening bid is usually equal to the outstanding loan balance, interest accrued, and any additional fees and attorney fees associated with the sale. If there are no bids higher than the opening bid, the property will be purchased by the attorney working on behalf of the bank.
If this occurs, and the opening bid is not met, the property is deemed a REO or “Real Estate Owned”. This typically occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender.
Banks have become accustomed to using this process to sell off foreclosure homes to remove them from their books. These homes are considered “toxic-assets”. Today, due to the U.S. foreclosure frenzy, banks are plagued with these toxic-assets while the courts that handle these foreclosure proceedings are backed up making the foreclosure process take longer then ever before.
With Federal Regulators breathing down the throats of banks to do something about all the defaulted loans on their books, banks are now seeking other non-traditional ways to get rid of their toxic assets……such as selling their non-performing notes and pools of Bulk REO properties to investors.
This new approach of bundling up Bulk REO properties and selling them at steep discounts saves the banks the headache of continuing to pay for the property taxes, hazardous insurance, utilities, maintenance cost and more importantly, removes the toxic assets from the banks balance sheets enabling them to stay in compliance with Federal and State bank regulations.
“What Are Bulk REOs?”
Bulk REO’s are foreclosed properties that banks own. Some of the homes may be currently listed with an Agent while others may not. Banks are not in the property management business. They are in the lending business and want these toxic assets off their books. Therefore, this has created a tremendous opportunity for investors who know how to play in this market.
A bulk package is also referred to as a tape. These tapes contain tens or hundreds (sometimes thousands) of REO properties. A tape is nothing more than an excel spreadsheet list of properties.
“Can I Do $1 Deals With Bulk REOs?“
Yes, in fact you can get started trading Bulk REO deals without any money. Let’s learn exactly how this can be done.
There are several ways to make money buying and selling bulk REO’s. Your options are either:
- Brokering Bulk REO Deals
- Buying Bulk REO Properties from Banks
Brokering Bulk REO Deals…
Brokering Bulk REO deals is much easier to do than buying them from banks. A Bulk REO Broker or Trader (some people refer to them also as Syndicators) acts as a middleman between the seller of a Bulk REO tape and a buyer. It is important to note that a professional license is NOT required to broker Bulk REO deals.
The great part about brokering Bulk REO deals is that you don’t have to use “Cash or Credit” to get started. Nor do you need an office, staff or car for that matter and you can do it part-time from the comfort of your home. Brokering Bulk REO deals only requires that you have a telephone, fax machine and a computer.
- Computer: Will be used to network with other Bulk REO Brokers, Bankers and Investors online.
- Telephone: Will be used to communicate offline with the people you network with online.
- Fax Machine: Used to send and receive all the documents and contracts when doing these deals.
“How Do I Get Started Brokering Bulk REOs?”
The first thing you have to do is understand the role of a Bulk REO Broker so you can find your niche to play. There are two types of Bulk REO Brokers. The first is a Seller’s Rep and the other is a Buyers Rep.
A Buyer’s Rep works exclusively with buyers who are looking to take down tapes. They match their buyers with sellers of Bulk REO tapes and charge a fee for their efforts for finding product for their buyer to purchase.
A Seller’s Rep works exclusively with sellers looking to sell Bulk REO tapes. The seller may be a bank, private equity fund, hedge fund or a private investor. The seller’s rep will get paid a fee for their efforts at finding a buyer to buy the tape from the seller.
Some Brokers work as both buyer and seller reps. The hat they wear will depend on what lead source they have. If they have a source of product for sale, they may become the seller’s rep. If they have a serious buyer of Bulk REO product they may wear the hat of the buyer’s rep.
I have acted as both the buyer and seller rep and made money. However, I prefer to wear the seller’s rep hat because my strength is creating marketing advertisements that sell Bulk REO product. Last month I closed on a small Bulk REO deal and made $25,000 working as a seller’s rep. It only took 4 hours of work to get this deal done.
Let me explain how this deal worked:
- Step 1 – Find The Product
A Bulk REO private seller called me about a small 24 home nationwide tape he had just taken down from a bank. He was asking $300,000 for the tape.
- Step 2 – Find A Buyer
I passed on taking down the tape myself but decided to call a buyer I knew who was interested in taking down a nationwide tape. My buyer was very interested.
- Step 3 – Arrange A Conference Call
I arranged for my buyer and seller to talk about the particulars of the deal. The buyer provided verifiable Proof of Funds (POF) to my seller and the tape was sent to him via email.
- Step 4 – Due Diligence
The buyer conducted his due diligence in 3 days and moved forward to take down the tape.
- Step 5 – Master Fee Agreement
The seller and I signed the Master Fee Agreement to pay me the difference between the seller’s price of $300,000 to me and my sale price to my buyer for $325,000.
- Step 6 – Contract & Closing
The buyer executed a contract and made arrangements to close the next day. Once the funds were sent to my seller’s Title Agent, I picked up a check for $25,000.
The worst part about brokering Bulk REO deals is finding REAL buyers and sellers. Most of my time is spent filtering through the fake buyers and sellers of Bulk REO’s. There are lots of fake buyers and sellers of Bulk REO who care nothing more than to waste your time.
As a Broker you have to learn how to distinguish between the real buyers and sellers of Bulk REO from the fake. There is an art to this and the better you are at it, the fewer headaches you will have, the less time you will waste and ultimately the more money you will make.
~ Kenny Rushing, House Hustler
About Kenny Rushing…
Kenny Rushing is a remarkable tale of a life turned around. A resident of Tampa, Kenny is best known for the moving story of his humble and troubled beginnings, and his phenomenal success as a real estate investor – in spite of the seemingly insurmountable odds he faced. He is a successful real estate investor, civic leader and devoted philanthropist. His company, Rehabbers Superstore, Inc., now grosses millions of dollars per year through real estate transactions and investments. Kenny Rushing is a living testament that: If KEN Can Do It – So KEN You!