With REO inventories diminished in part by longer foreclosure timelines in some states and competition for distressed property investment heating up, buying distressed properties is not as easy as it was, according to John Vella, COO at Equator.
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As a result, in some cases investors have begun to alternatively target different types of distressed mortgage assets, or they may try to counteract the tight markets with scale.
“There are short sales out there, so you see people getting involved in the short sales market. But in the REO market buying at the foreclosure step has become really competitive and really squeezed the margins, so you better have scale as well as holding power if you buy that,” Vella said.
In addition to targeting short sales, some investors have been purchasing nonperforming loans with the aim of getting a hold of properties in judicial states with longer foreclosure timelines early on rather than waiting for those loans to reach the foreclosure stage, he said.
“With a lot of transfers of portfolios [in the market], there are opportunities to buy nonperforming loans” in terms of potentially making a return on working them out or renting them out, said Vella.
“There is inventory coming out of those judicial states eventually,” he said. “The loans that are sitting there in foreclosure will eventually come out, it’s just they are coming out in dribs and drabs, not in huge volumes.”
As to forecasting when that inventory is coming out, it remains difficult to predict as it may be influenced by many factors ranging from regulatory developments to unemployment, Vella said.
Investors also are selectively buying in areas where they feel there’s going to be enough appreciation to make the investment worthwhile over an acceptable investment horizon, he said. They may consider the cash-flow return if they buy with a rental strategy in mind as well as the return from possibly reselling the property down the road, as well as the holding costs until that happens.
“You have to price these things correctly and model them out correctly before you make your decision. If you are investing you have to have data, you have to have the proper technology to manage it and be able to analyze your data,” said Vella. “You need to pick and choose your areas and be very smart about how you are going about this.
“People will find out they can’t compete in the market because they either don’t have the infrastructure or the size or the capabilities that other groups have. I think that people that have bought in the past may not have had the expertise, so that could come back to hurt them [in terms of not getting the margins they were expecting]. But the [people] that know what they’re doing and bought at the right time will make good returns.”
REO-to-rental investment has had both its supporters and skeptics. When asked for his take on it, Vella said, “I think with the rental strategy, again, if you know what you’re doing, you have the proper technology and expertise to manage it and you’re buying in volume, you can make margins on it.”
