Let me share something on how to buy REOs versus Non-Performing Notes with You.
A hard choice, I know.
I know a lot of people would wonder why they should buy non performing notes when they could buy real estate at such a low price.
Yes, REOs can be cheap.
Yes, REOs are real property and not just an obligation of debt.
And if you price the REO correctly, it can be sold quickly. So why isn’t everybody buying REOs?
Buying REOs: 4 Risks Involved
1. Valuation
With REOs, you have to be certain on your home value and the condition of the property. Non-performing notes however, leave you with more options to turn your note into a cash flow opportunity like getting your borrowers to make payments, for example.
It is a necessity to be certain of your REOs value and the condition of your property. In order to squeeze profit from your vacant property, these values are key. When you are buying notes, this information is not as important.
2. Purchase Risks Involved With REOs
If your sources aren’t nailed down, they can waste your time. In most cases you are dealing with brokers who are 2-5 people deep in a chain, and a fradulent attorney that claims they have mandate for someone else.
3. Deal Risks
A friend of mine was chasing after an REO deal that comprised of 16 REOs. He chased this deal for 2 months and at the end was only able to purchase one property. It turns out, all the other properties were listed for sale and were pulled because the agents got them into contract.
Or they can be lost to a competitor since there were about 3 brokers inbetween my friend and the seller. It was probably only because the REO wasn’t already listed, that he got the property. Non-Performing note pools have a lower “loss ratio”. This means that the rate at which notes are pulled from the pools are as high as compared to REOs. (someday I’ll tell my story you about the west coast pool I lost!)
4. Discount Risk when Buying REOs
REOs don’t usually have discounts that are quite as juicy.
You can close on a note buying deal at a 30% discount and you will hear about pricing this low on a regular basis. REOs priced at this range are typically unheard of.
I am not telling you not to invest in REOs. I just want you to walk into it with open eyes. Know what you are getting into and just be aware of all the hype that is involved with REOs right now, and don’t fall into it.
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