How to buy REOs in comparison to buying Non-Performing Notes.
I agree, it is hard to choose.
And I’m sure some people look at non-performing notes and say “Why would I EVER want to own paper when I can own the real estate for soooo cheap?!”
Yes, REOs can be cheap.
Well, yes. It is real property as opposed to a debt obligation.
And, yes. You can get rid of it pretty quickly if you price it right. So why shouldn’t everyone drop everything they’re doing and buy REOs?
4 Types of Risk When Buying REOs:
1. Risks in Valuation
You must be precise with the value of the home, as well as the interior condition. When you have a non-performing note, you have several options in ways to turn your note investment into positive cash flow. (example: getting your borrower to make payments).
When you have an REO, it can be much harder to gain profit from your vacant property. Of course you can do it, but your knowledge of the area and its values, as well as your properties condition must be better when buying an REO as compared to buying notes.
2. Purchase Risks
When dealing with REOs, you are usually stuck in a situation dealing with 2-5 brokers deap in a chain and an attorney who is probably fradulent but claims that they have mandate for someone else. Unless your sources are good, this can really be a waste of your time.
3. REOs-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 were lost to a competitor since there were 3 brokers in between him and the seller. The one REO not pulled was the one that wasn’t already listed. The “loss ratio” on non-performing note pools - in other words the rate at which notes are pulled from a specific pool - aren’t as high by any means. (One day, ask me about the west coast pool that we lost!)
4. Discount Risks
The discounts that you typically hear about when buying REOs may not be quite as juicy as you’ve been made to believe.
Note Buying deals can close in the 30%’s. Prices like this for REOs are usually a dream. Non-performing notes deals are priced like this regularly.
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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