Bulk REO investing is BIG business these days and everyone is looking to get involved. This article is going to share with you the difference between a REO (real estate owned) and a Non Performing Note (NPN), and how you can profit from the two as an investor.
What is an REO?
An REO (Real Estate Owned) property has previously been foreclosed on and unsuccessfully sold at a real estate auction, and is presently owned by a bank. When a home is at this stage, it's available to be sold for a large discount because banks are anxious to get rid of the “toxic asset”. Banks are not in the business of managing properties. With Bulk REO's, groups of homes are packaged together and sold in bulk in order for banks to increase their cash flow.
How to Profit from Bulk REO's?
The Representative Approach
With Bulk REO investing, you have a chance to step in as either a buyer or seller's representative, and make significant profits. As a representative, it's your job to broker packages either for the seller or buyer. Typically, you will make money by charging points. Each point represents 1%. Therefore if you make 3 points on a $1,000,000 deal your fees will be $30,000.
In addition to points, you can also use the “spread” strategies to increase your profits when brokering these deals. For example, let's say a Bulk REO wholesaler is selling a package for $400,000, and you offer it to another client for $450,000. You have just worked the spread to make $50,000.
The Cash Buy Approach
If you have the right connections with banks, your second option is to become a Tier 1 buyer of Bulk REO's. These are usually private equity funds, hedge funds, real estate investment trusts, or high net worth investors that play in the game who have the cash to buy packages of 100 plus homes. This is where you get the greatest discounts-when buying directly. Then you can re-sell these homes wholesale to secondary buyers for maximum profit.
Rent or Sell Approach
Third, you can buy Bulk REO's to rehab them for rent or sale. With this option, after the home has been rehabbed, you can sell the house either with the borrower taking out a conventional mortgage with his/her bank, or if they are credit challenged, obtaining an FHA loan. If the borrower cannot qualify for either the two you may want to consider seller financing.
What is a Non Performing Note?
A Non Performing Note is a mortgage that has not been paid and is in danger of being foreclosed on by the bank or note holder.
How to Profit from Non Performing Notes?
The Quick Flip Approach
The most desirable option when buying Non Performing Notes is to buy properties at favorable discounts, and sell them quickly for an admirable profit. With this method, you'll have the luxury of avoiding delinquent homeowners. Let's say you buy a $1 million property at 20% of the unpaid principal balance (UPB), and swiftly sell it at 30% of the UPB. You just made $100,000 profit.
The “Cash for Keys” Approach
A second possibility is “cash for keys”. With this method, you can buy out the former homeowner who still lives in the property. For example, you pay off the homeowner by giving them $10,000 cash; they will sign a Deed in Lieu, and shortly after, leave the home. As the owner of the NPN, you were able to avoid fees attached to foreclosing on the property, and help out the former owner by not placing a deficiency judgment on them, or reporting a foreclosure to their credit report. Now, you can quickly list the property for sale on the market, or rent the property to a tenant for a long term hold strategy.
Reduce the Mortgage Principle Balance Approach
Third is to negotiate a deal directly with the homeowner, and bring the property out of its non performing state. This option is the most challenging and will require a team to work out the non performing notes with the homeowners. For example, let's say you purchased a non performing note for $40,000 but the unpaid principle balance (UPB) is $200,000 with a 10% interest rate on the mortgage. As the NPN holder, you can opt to cut the UPB in half ($100,000) and decrease the interest rate to 6%. You have now written a new, and more affordable, mortgage to benefit the homeowner. After 6-12 months of timely payments from your homeowner, your once distressed asset is now a performing note ready to be resold to an investor.
Bulk REO's and NPN's are the way to go in this current real estate market because you're buying distressed assets at rock bottom prices. Some investors focus on one niche, either REO's or Non Performing Notes while others, like me, invest in both sectors. Choosing the right niche depends on several things; your short and long term investment goals, how long you can commit your money into an asset before you need to recover those funds (typically, it may take longer to get your money back if it is invested in an NPN); if you prefer to own the paper (mortgage note) as opposed to the tangible assets (deed); or what your exit strategy entails.
Whichever niches you decide to invest in, just make sure you buy the note or the REO for a price that will allow you to make a handsome return on your investment.
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