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I would like to share something on how to buy REOs vs. Non-Performing Notes with You.
It’s a tough choice, I know.
Many people probably would ask themselves…”If I can buy real estate so cheap, why would I want to own bad paper and buy non performing notes?”
Cheap REOs are out there, I agree.
Yes, REOs are real property and not just an obligation of debt.
And if you price the REO correctly, it can be sold quickly. So why isn’t everybody buying REOs?
4 Types of Risk When Buying REOs:
1. Risks in Valuation
With REOs, you have to be certain on your home value and the condition of the property. Non-performing notes however, leave you with more options to turn your note into a cash flow opportunity like getting your borrowers to make payments, for example.
It is a necessity to be certain of your REOs value and the condition of your property. In order to squeeze profit from your vacant property, these values are key. When you are buying notes, this information is not as important.
2. REOs-Purchase Risks
They can be a time waster until you nail your sources! Usually you are dealing with 2-5 brokers deep in a chain, and at least one ubiquitous “attorney” who is a fraud and huckster claiming he or she is (not has, but “is”!) a “mandate” for someone else.
3. Deal Risks
A friend of mine just spent 2 months chasing one deal of 16 REOs. He just closed on 1 of them. All the others were pulled by the seller as the agents (all but 1 were listed) got the properties into contract.
Or they can be lost to a competitor since there were about 3 brokers inbetween my friend and the seller. It was probably only because the REO wasn’t already listed, that he got the property. Non-Performing note pools have a lower “loss ratio”. This means that the rate at which notes are pulled from the pools are as high as compared to REOs. (someday I’ll tell my story you about the west coast pool I lost!)
4. Discount Risks
REOs don’t usually have discounts that are quite as juicy.
You can close on a note buying deal at a 30% discount and you will hear about pricing this low on a regular basis. REOs priced at this range are typically unheard of.
I’m not panning REOs by any means. Just jump in with your eyes open, and don’t get fooled by all the hype that you’re reading about the REO deals to be had right now.