Bulk REO Sold Through Bidding Transactions

Buyers of bulk REO properties are working with sellers and lenders to make the process hassle-free and as streamlined as possible.

In order to avoid conflict or inconsistency, a majority of the transactions that are taking place are bid processes as opposed to negotiated deals, according to speakers I heard at the recent Distressed Asset Roundtable and Exchange in New York, hosted by DS News.

The industry has changed dramatically in the last couple of years, one panelist noted, based on the dramatic, increased number of entrants who are buying or want to buy bulk portfolios of real estate-owned assets.

Speakers said they are seeing a lot of “wannabes” who really want to do “flips” or mark up properties in bulk portfolios, resell them and never put up a penny. It is indeed a competitive environment and the success ratio is often low. Buyers spend a lot of time doing due diligence and walk away with nothing. That is the nature of the beast. They continue to bid on portfolios, know their chance of success is relatively low. Banks have different philosophies for dealing with bulk REO. Some sellers only want to do end-of-the-year cleanouts and take writedowns. Others operate by doing big bulk sales at the end of every quarter. It changes from bank to bank. Some have even chosen not to do it anymore and have discontinued bulk sales.

But for those willing to be patient and work hard in this very dynamic market, there are opportunities out there, the speakers all agreed.

The last time there were a lot of bulk REO sales was the late eighties or early nineties. Today, to be in this for the long haul, investors must be willing to have people available to do evictions and rehab, said John Berczuk, vice president of default administration, Wells Fargo Corporate Trust. “These are old, beat-up homes, and you can’t sell these properties. Be prepared to take on that piece. It’s not like what you see on late night TV. No one buys a house and flips it the next day. It doesn’t happen. There is no such thing as a quick buck. If you are in it for that, you’re going to have a tough time.”

It’s important to have people on the ground in certain geographic areas to go into these local municipalities and know the laws where the properties are located. “You have to be able to handle code violations. You can’t just sit in your air-conditioned houses,” Mr. Berczuk added. “Know what you are looking at. Walk the streets in Detroit. Know the neighborhoods you are investing in. Know the market you are buying in, don’t just look at the numbers on pieces of paper. Some of the neighborhoods are high-crime areas.”

Some investors in the audience said it is often difficult to make contact with the right person who works at a servicing shop who deals with REO, because that person has moved on to some other division. Servicers are getting 20 to 30 calls a day from wannabe investors saying, “We can get you properties.” Once a legitimate investor forms a relationship with the right contact at the shop, they are usually extremely helpful. It’s about building relationships with the true sellers.

With REO and foreclosure inventory looking like its going to double in the next couple of months because of the foreclosure moratoriums, some investors feel there might be narrowing of the bid-ask spread. Mr. Berczuk said he doesn’t believe there is going to be a tidal wave of REO.

“They’ve been talking about it for over a year now about how it’s going to explode. There are many loss mitigation programs and so many moratoriums out there. There is no way the people in Washington are going to let the REO market implode. It’s not going to happen.

"Foreclosures and REO are going up, absolutely, he said, “but we won’t let the economy get another depression.”