Investors Beating Banks at REO Game

Red tape, rehab standards are only some of the reasons for discrepencies. After millions of dollars in investments, adding thousands of new staff positions and even contracting to third-party brokers, the large banks still can’t sell foreclosed properties fast enough to ease the vast overhang of REOs bedeviling their books.

Meanwhile, on the dusty streets of places like Glendale, Ariz.; San Bernardino, Calif.; and Henderson, Nev., independent investors have been buying up defaulted properties, rehabbing them and putting them back into the market at a pace that makes the banks look geriatric in comparison.

“Third-party investors are much faster at reselling foreclosures than banks, though the difference varies by area,” said Sean O’Toole, founder and CEO of ForeclosureRadar. ForeclosureRadar, based in Discovery Bay, Calif., focuses only on Western states, but its research is still very relevant and predicative. According to ForeclosureRadar data, Oregon banks took 156 days longer to sell foreclosure inventory than third parties; California, 104 days longer; Arizona and Nevada, 70 days longer; and Washington, 52 days longer.

“ForeclosureRadar statistics show real estate investors continue to far outperform banks in dealing with distressed properties,” O’Toole said. “Yet, politicians and bureaucrats are putting pressure on banks to become landlords, which will hurt local economic activity as fewer properties are made available to local investors, also impacting their Realtors, contractors and property managers, as well as homebuyers in need of affordable housing.”

The major blank spot in the pure data for me was, why, after so much investment and staffing, big banks still couldn’t get rid of their REOs at a consistent pace. That was the question I posed to O’Toole and to the founder and CEO of another foreclosure Web program, Brad Geisen of in Boca Raton, Fla. O’Toole and Geisen agree on a number of key points, the first being that self-interest on the part of investors is a huge motivator. “Investors are doing this on their own behalf; it is their money involved,” Geisen said. “They want to settle as quickly as possible with maximum returns. “O’Toole added, “Investors put forth their own money, and the return correlates with how quickly they get that property cleaned up and back out on the market.”

Certainly, the banks would have the same goals, right? That motivation isn’t as clear for banks, O’Toole said. “Certainly, the banks are saying that is their goal, but the individual managers within the banks and even the Realtors who work for the banks don’t have a couple of hundred thousand of their own money in the deal. If they did, they would have higher motivation. “Most banks pawn off all the work onto independent brokers, who are in the deal for one thing: to get a commission, Geisen said. “They don’t have a financial interest in what a property sells for. They are going to do the least amount of work they can to sell that property. What you have in most cases is the banks relying on what the brokers tell them for their decision-making.”

But haven’t the banks hired Realtors? “The banks have certainly hired a lot of people with great resumes on the real estate front,” O’Toole said. “And they are using experienced Realtors. As an investor, I’ve used REO brokers in the past and they have done a fabulous job. This has more to do with efficiency of a large organization versus the efficiency of the individual. Most productivity happens inside a small business, not a mega-corporation. Individuals and small businesspeople are more motivated and productive.”

The problem with big banks is red tape, Geisen said. “A lot of times the banks set up policy, and things have to go that way. In some scenarios it works well and it other cases it doesn’t. One policy across the board to plan for every asset they have doesn’t take into account differences. “The key point being that investors are quick to adapt to changes in the market.

O’Toole uses the example of cash-for-keys (tenants who are victims of foreclosure receive cash in exchange for surrendering the keys to the house and vacating). “When I was doing foreclosures back in 2003 through 2005, we rarely paid a homeowner more than $500 after a foreclosure,” O’Toole said. “Now, it is not unusual for investors to pay $5,000 for the tenant to move out quickly. Investors are flexible and look at the individual situation rather than put in place blanket rules that are executed by junior managers and dictated to Realtors without giving the Realtors the same flexibility that investors have.”

Perhaps the biggest problem the banks are having is deciding when to rehab a foreclosed home and when not to. Some banks have a policy of ‘We don’t renovate any of our properties,'” Geisen said. “Other banks have policies where they renovate all their properties even in areas where it doesn’t make sense, as renovation costs are far too great. Bank policies need to be flexible, and they just are not.”

In the last housing bust, back in the early 1990s, contractors were sent in to clean up homes, install new carpet and repaint. Investors still do these things, which many will say is a key reason why these homes sell faster. Banks, O’Toole said, “rarely do more than (take the) trash out, (and) rarely do much in the way of repairs, repainting or recarpeting.”

“Our California customers buy somewhere between a half billion and a billion dollars worth of property every month and are hungry for more,” O’Toole said. “The primary issue here is, the banks are not reliable as to how they put this product out through the trustee sale mechanism. They could do a better job.”

Steve Bergsman is a freelance writer in Arizona

Buying Discounted Mortgage Notes as an Investment

Mortgage Note Buyers Can Make an Attractive Profit with Minor Effort

Mortgage notes are loans which are created when a home is sold. Private mortgage notes are funded by a home seller rather than a bank or lending institution. They are also known as cash flow notes, seller financed notes, owner financed notes or seller carry-back notes.

Why Would a Private Mortgage Note be Created?

There are many reasons a home owner might elect to fund the transaction privately. Private transactions can be approved and funded much more quickly than a bank funded loan. The lending criteria may not be as strict as they might be if a bank were involved, which increases the buyer pool for the seller’s home. If the home is non-conforming, it may be difficult to impossible for a buyer to get approval for a mortgage from a bank.

Privately held mortgage notes are sold at a discount because of the time value of money.This means that the value of the mortgage will decrease with time because of factors such as inflation. Think of it like this: If someone were to offer to give you either a $10 bill or a $20 bill, you would likely choose the $20 bill. But what if you could have the $10 today but had to wait 5 years to get the $20. Which would you choose now? Most of us would choose the $10 bill today because we realize that $10 today is worth more than the promise of $20 five years from now. This is the time value of money.

Why Would a Note Holder Want to Sell Their Mortgage Note?

There are many answers to this question. The note holder may need a large sum of money immediately for purchasing another home, buying a car, sending a child to college or to start a business. Whatever the reason a large lump sum of money may be more valuable to the note holder than smaller amounts received monthly. In addition, the note holder may not want to worry about whether the mortgagee might default on the loan or just may not want to deal with servicing the loan.

How Does a Mortgage Note Buyer Know whether the Note is a Good Investment?

To determine the value of a mortgage note, the risk involved with the note must be evaluated. The higher the risk involved with the mortgage note, the larger the discount taken will be.

Consider the following criteria for evaluating the risk involved with the mortgage note:

  • the credit worthiness of the mortgagee (the person making payments on the loan)
  • the value of the property which serves as collateral for the loan
  • the terms of the loan (interest rate, length of term, etc)
  • the amount of the down payment made on the property
  • the status of the loan (current, in default, late payments, etc)
  • the loan to value ratio (the amount of money remaining to be paid on the loan balanced against the value of the property which serves as collateral for the mortgage note)

Individual mortgage note buyers will need to determine their own standards for assessing the amount of the discount offered on the mortgage note and the amount of risk they are willing to accept as in any investment. — By Lorie Huston

Sierra Heritage Realty
530-477-6755 or 530-386-6236
Serving the Grass ValleyNevada CityAuburn and all of Nevada County surrounding areas.