Distressed Property Blog

In a blog entry a couple of weeks ago, I suggested you take your lead from the big boys when it comes to approaching real estate. Times are tough for real estate agents all over the country, but as James Hagerty, who has covered housing and economics for The Wall Street Journal since January 2004, pointed out last week brokers specializing in selling bank-owned properties are getting ahead . There is good advice to be found in Hagerty’s observation, and it is, simply stated, “Specialize.” While real estate professionals can certainly thrive in this environment, foreclosure investors also can do very well by specializing in bank-owned properties.

First some stats that fuel Hagerty’s article (“Foreclosure Agents Thrive While Others Struggle to Survive”):

• In 2007, sales of previously occupied homes nationwide were down (only 5.65 million, down 20% from 2005)
• Membership in the National Association of Realtors has dropped to 1.24 million (it was 1.37 million in October 2006)
• A First American CoreLogic study indicates that lender-owned homes account for roughly one out of nine homes listed for sale
• According to the Greater Las Vegas Association of Realtors, foreclosure-related transactions accounted for 52% of all sales in the Las Vegas last month

These are some pretty powerful numbers if you intend to specialize in investing in lender-owned or real estate owned (REO) properties. Do not be deluded, however. Specializing in this sector is far from the land of milk and honey. Specializing in bank-owned properties is hard work—if you are a professional REALTOR®, the commissions are generally lower, the hours are longer and, increasingly, there are risks associated with entering deserted neighborhoods where a majority of the homes are unoccupied. If you are not a professional, but instead a serious investor, there is plenty of legwork that goes into every successful return on an investment. Nonetheless, for real estate professionals specializing in REO properties, the work is steady and even increasing as many of their colleagues are looking for the exit sign. For foreclosure investors, there is A LOT of money to be made in this specialized aspect of foreclosure investing.

Last week, more than 2,000 so-called “default industry professionals” wrapped up the REOMAC conference in Indian Wells, California, where they talked shop over bad conference food and (I hope) free cocktails. REOMAC is a nonprofit trade association that serves the mortgage default industry “highlighting timely industry concerns affecting day-to-day operations, and evaluation of current and prospective legislative issues facing default professionals.” As Shelley Kaye, REOMAC president, says, “Our members are facing daily changes within the current real estate market.” What kind of changes? Well take a look at some of the offered sessions:

• “REO 101 – Basics of handling REO properties, including the valuations, utilities, cash-for-keys, and property maintenance”
• “Repairs and Rehab – Explore the ongoing question of whether REO properties should be repaired or rehabilitated and to what extent”
• “Managing the Surge: Default to Foreclosure – Learn how collection efforts have changed, the use of short sales, foreclosure time line management, the use of technology, communication, and how to deal with rescission jurisdictions”

Whether you are a “default industry professional” or not, you can see that these are the issues on which people in the know are increasingly focusing. Guess what? You should too. So let’s hit some quick tips and warnings for the foreclosure investor considering specializing in bank-owned/REO properties.

1. First off, remember that the job of a bank’s REO department is to sell property acquired through foreclosure. This gives you, the person considering investing in that REO property, an edge when you sit down at the negotiating table because you can assume (in most cases) that the bank does not want to spend any more money than absolutely necessary in capital reserves earmarked for REO properties. In addition, REO properties already on the bank’s books are a liability until such time as the property is sold. In other words, be confident—the bank really does want to sell you this property.
2. While the lender is what we might call a motivated seller, the sale of REO properties generally takes longer than other kinds of sales. Be patient and plan to be in it for the long haul. While you may get frustrated that your questions are not answered quickly by the individual with whom you are working in the bank’s REO department, realize that patience, persistence and knowledge will help you prevail at the end of the day.
3. Finally, be sure to identify the current market value of the REO property and compare that to the price the lender is asking. Conducting your own comprehensive market analysis will help you decide what price to offer. Keep in mind that the lender is often trying to recoup the outstanding balance on the loan, but if the market value in the area is lower, bring this knowledge to the negotiating table. Also be sure to inspect the property personally, as REO properties are generally sold “as is.”

Overall, if you want to specialize in this type of foreclosure investing, be patient and do your homework. Knowledge is power, and the lender will be most likely to accept an offer lower than what they are asking if you can demonstrate that your offer is fair. It’s not easy, but specializing in REO properties is perhaps the most lucrative aspect of the real estate world to currently be pursuing.