Remember playing Monopoly and saving up to buy the fourth house so that you could build a hotel to double your rent? What if you had the opportunity in real life to purchase ten properties at once and start collecting rent from all of them? Massive numbers of bank-owned properties are hitting the market giving wise investors the opportunity to make just this kind of bulk purchase (a.k.a. bulk REOs). Last year, banks sold hundreds of thousands of properties as bulk REOs. This trend will continue through 2011 as a record number of properties continue to be foreclosed upon and the cost of entry remains low.
How low? You can get in the game for as little as $50,000 for a small portfolio of cash-flowing bulk REO properties or as little as $100,000 for ten or more properties ready to be turned into cash-flowing, wealth-building engines. These homes are not in the high rent Park Places of the world, but in the working class Baltic Avenue-type neighborhoods – giving investors the ability to buy ten homes for the price of one or two.
The first premise of the bulk REO business model capitalizes on the large underserved market of working class people who earn enough to cover rent, but cannot qualify or save enough to buy a house (see “Why Good Folks Can’t Get Loans”). Working class people are willing to buy houses and are willing to make repairs-at the right price. That price is equivalent to rent. It makes sense. Let’s say the average rent in an area is $450. Offer a working person a seller financed home for $450 or less per month and they’ll take the deal. And they’ll make the payments because they already have a history of making rental payments. These loans are designed to succeed, not doomed to fail.
The second premise of the bulk REO business model is that it provides a healthy cash flow with interest rates around 9.5% and an average term of 15 years.
Purchasing bulk REOs give investors the opportunity to put these portfolio building strategies into action. An active investor will purchase 10+ houses and then resell them to owner-occupants with seller financing (also called land contracts, contracts for deed, or installment contracts). The investor’s name remains on the deed for the term of the agreement while the owner-occupant makes monthly payments. The owner-occupant also has full responsibility for taxes, repairs, and upkeep of the property. At the end of the term (15 to 20 years) the deed is transferred to the owner-occupant. Meanwhile the investor makes a significant return on the initial investment.
For Example:
Bulk purchase price $12,000 (one house)
Sale price $37,000
Down payment $1,000
Financed price $36,000 (15-year, 9.5% interest)
Amortized over 15 years $67,500
Less purchase price -12,000
Return on investment $55,500
Passive investors who want access to the great returns, but don’t want to set up a bulk REO business to sell houses to individuals, may buy into the business. They purchase the land contracts and the underlying properties from active investors who initiated the seller financing and are looking for cash. These contracts are sold at a discount, which offers even more upside for the passive investor. For example, a 15-year, 9.5% interest contract with a face value of $36,000, bringing in $375/month, can be had for $26,500. Over its term, the contract will bring in $67,500; that is a 40% return on investment.
Buyer Beware
The bulk REO market is an exciting and fast-paced business, but as with any potentially high return investment, there are many charlatans. The internet is full of web sites purporting to sell bulk REO lists (also known as bulk REO tapes); however, some of these lists are fraudulent, and others contain truly unsellable properties-burned out shells, vacant lots, and uninhabitable mobile homes. In order to navigate this challenging marketplace, trusted mentorship from a reputable list broker is imperative. Do your diligence. Ask for references. A reputable company will happily provide more than five references from non-relatives! Find out about post-sale support and get it in writing. Ask about fees. Some companies hide their fees, others offer full disclosure, but all companies charge fees. Finally, take the plunge. The market for severely undervalued homes will dry up. Will you be the person with an income producing portfolio to see you through your golden years? Or will you be the person saying, “If only….”
Why Good Folks Can’t Get Loans
1. Banks don’t make loans for less than $60,000. The value of most of bank-owned homes is $50,000 or less. Without private financing, these houses will continue to sit vacant.
2. Many low-income families struggle to keep a good credit score. Banks don’t like this. The savvy private investor knows that credit scores do not predict the ability of a person to pay a mortgage. The monthly payment is the predictor: right-priced loans get repaid.