Bulk REO’s. It is the hot new strategy of 2009. I get at least 5 calls or emails a day from people saying they “have” a bulk portfolio they are looking for me to buy. Usually these people have email addresses like firstname.lastname@example.org and can never actually produce any documentation about their portfolio when I ask.
So, here is the lowdown on the bulk REO portfolio strategy.
Is this a real strategy? Yes.
Are there bulk portfolios out there that I can get control of? Yes.
Can I get financing for bulk portfolios? Yes.
The answer to all of those questions is yes, but you HAVE to know what you are doing – just like in any other strategy. I could easily wake up one morning and announce, “I am a rehabber” but I promise you that just saying it doesn’t suddenly give me the ability to install carpet or drywall.
Heaven help the poor person that lives in the house that I personally rehab. They may as well live in a tent. Get my point? Just saying it doesn’t make it so.
So, obviously bulk REO’s are popular now as a result of the foreclosure crisis. So many investors (especially builders) have lost value and cash flow AND have had their lines of credit shut off that they have had to walk away from their holdings. The banks that have taken back these properties need to to move the bulk units to maintain regulatory and liquidity requirements. Portfolios are being offered at incredible discounts. Typically, the bigger the package the greater the discount.
So, how do you get in on this action. As I see it there are two models:
1) Be a syndicator
2) Be a rehabber
Let’s take a look at both. First, if you are a syndicator you are negotiating with the banks directly to get access to their portfolios – both performing and nonperforming- and then making these properties available to hedge fund/private equity buyers or individual investors.
You may come across companies or individuals who are “compilers” or “mandates” saying that you can get access to their portfolios to syndicate. That won’t work. That’s what’s called a “daisy chain” in the business and you’ll never find a buyer. If you want to be a syndicator, you need direct access to the bank that controls the portfolio. If you’re getting your inventory from a “mandate” or a “compiler” then the best you can say to a potential hedge fund buyer is “I know a guy who has access to bulk REO’s.” YOU need to be the guy.
If you are a rehabber, you are taking down these portfolios yourself and putting a team in place to rehab and flip to retail buyers or hold in a rental portfolio. In this case you need access to a big line of credit, cash investors or ideally, both.
Most of the big dogs that are doing this strategy not only have lines of credit but they have also negotiated a master loan commitment with a portfolio lender to provide “take out” financing for the properties that they purchased with their line of credit.
So, how do you get started? Decide which model you want to purse and then take action. To be a syndicator you’ll first need some “proof” to show the banks that you’re the real deal not just some poser. They’ll require some sort of proof of funds. You can get this letter or proof of funds from the hedge fund that has agreed to look at your deals. Like any good syndicator, I urge you to first build your buyers list. The buyer will tell you exactly what they want and then it’s your job to start calling portfolio lenders – small banks and credit unions- to find it. You can also try the disposition departments at REIT’s.
If you’re going to be a rehabber, pick your market, build your team on the ground, get your cash investors and/or line of credit together and contact the portfolio lenders to see what you can get. Typically, you cannot cherry pick, you have to take the whole chunk of properties. Immediately start marketing to investors who want “turnkey” investment properties – already rehabbed, tenanted and maybe even Section 8 approved.
My best advice is hone your strategy and BE PROFESSIONAL. You’re not dealing with some schmo that’s in foreclosure because he got a 100% negative amortization loan, you’re dealing with PROFESSIONALS who DO NOT want to waste their time. Don’t use a ridiculous email address and solidify your relationships before you start marketing the portfolios. If you get an interested buyer can you imagine how fast you’ll lose your credibility if you can’t deliver?
OK, so that’s the very high level low down on the bulk REO strategy. I know this is a hot topic and MANY people have questions so I’m doing an in-depth virtual class on this topic this month.