Monday, January 12, 2009

The Last Man Standing WINS!

Is anyone else tired of the "Instant REO Profits" scams being offered these days?

Let me provide just two examples of what I consider outright fraudulent advertising. One makes the promise that anyone can learn to profitably buy and flip REO's completely sight unseen. Puhleeze.

The other is that "anyone" can learn to flip 10 houses in less than five hours a week. Really again, "Oh Puh-leeze".

As an REO buyer goes, the nuts and bolts for successful prospecting, marketing, and investing haven't changed much, except for the ease of locating REOs' on the net. REO inventory used to be a guarded bank secret. Anyone who bought an REO course in the 1980's read a chapter about the "unknown secrets revealed" of how to get a banker to reveal their REO inventory. Back then lenders with REO's were as nervous as pregnant nuns about word getting around that their banks had become poor risks.

Several years ago I had the worst time getting a bank to tell me what they had on the books. They did offer me "onesy-twosey revelations" of "pretty" houses that they were marketing at full retail. "Next!", I said.

Even as recently as 1995, a bank officer dropped his voice as if sharing a dark "secret" with me about his "one" REO. Of course he had more than these, but he couldn't afford to let somebody spread the word this bank was "loaded with REO's [OREO's for those of you on the East Coast]. Someone's head would roll if this happened!

It was hilarious. I was respectful, but it was somewhat annoying.

Today? No problem. Banks barf up REO listings on the internet. They don't give us details often, but at least we can see how many properties are listed in say, Sacramento, CA (not only the State Capitol of CA, but the REO Capitol of CA, too!)

Now the information I'm going to offer here is not just for the pros, but for those just starting out. Once we've developed a reputation as a solid reliable buyer, things snowball. Agents, bank officers, friends of friends, and referrals will eventually keep you as busy. Meanwhile, I offer these real world tips...

From my experience in no particular order... (A. B. --- this is for YOU!)

The very first shortcut is...(drum roll, please)...

1) Treat your REO investing as a full-on business enterprise. Anything less, and success will be long coming, if not bumpy and inconsistent.


I'm not describing a part-time effort with a promise that you can do this in your underwear and never have to talk with anyone, or view property. If you want this strategy, I've got a bridge you can buy for cheap!

If you're still reading, here's my take on buying REO's profitably and efficiently (the true short cuts):
  • As you immerse yourself in the process, you'll discover which banks are dealing, and at what price point. Right now I know of three banks that are dealing, and at what price point. This is to say I know three lenders that are dumping their inventory at about .60 cents on the dollar (rather, .60 cents of current retail --- there's a distinction).
  • I always say focus on a farm area. However, with REOs, your farm may necessarily be defined as a certain property profile, not necessarily a certain geographical one. You'll probably discover that the REO's you can buy for a cheap price, are scattered over three counties in a given month.
  • Be prepared to compete harder in the more densely populated areas. There's a lot of amateur competition that will agree to pay much more than we will if we stay in highly populated areas.
  • Be patient. Remain friendly. Until we start getting referrals and inside information, we've got to try to be the last man standing, as it were, until after the bank wades through all the flakes that offer to pay more, but ultimately fail to close for any number of reasons.
  • Accept that 1 in 50 offers gets accepted early on. This statistic dramatically improves as our reputation improves --- and after we become more confident in making wholesale offers at the outset.
  • It can take two or three months of waiting, being ignored, negotiating, and countering before we close on a profitable deal at the beginning. Again the processes shorten up and become somewhat more efficient once we get a full head of steam.
  • Some banks want proof of funds regardless of where you're getting your money. Before we've proven ourselves as buyers, we'll be asked to jump these hoops, meant to filter out the seminar grads.
  • We only want to make "profitable offers". That is, if we plan to buy at 65% or less of A.R.V., we've got to initiate an offer that allows you to go up to that limit. If we start at 65%, where can you go, but upside down at that point.
  • Our opening bids should start at 40 to 50 percent of the retail value, minus repairs (giving the bank a "net offer", or letting them know exactly what they'll receive after all closing fees and sums are paid.
  • This practice alone will separate you from the amateurs. Amateurs can't seem to have the heart to actually make offers they can make money with, and will feel "good" making retail offers of 80 to 90% of ARV. That IS Stupid. Especially when the first 20% of the deal, not accounting for repairs, goes to everyone, but US. So, buying at 80% of ARV, minus repairs, means we make NOTHING!
Ok, here's two property inspection/negotiation options for your consideration...
  • Option 1) Complete a thorough inspection of the property (which I do love doing), and then make a fully informed offer with tactical wiggle room for negotiations ******OR******
  • Option 2) Analyze the comps, assume $30k in repairs, subtract the repairs form the ARV, chop that number in half, and submit the offer. If you do Option 2, and get an accepted offer, you'll then inspect the property and 'find' all sorts of things you "didn't expect," and then try to "educate" (beat the crap out of) the bank over a lower price.
[edited] I omitted my suggestion to avoid Option 1, because following option 1 would mean checking out three dozen properties before making an offer. Well, that's fine if you're only making an offer or two, and have lots of time to waste. It's better to look carefully at a property after you've got an accepted bid, especially when you have more than a dozen outstanding offers to make.

Frankly, for those of us who are actually trying to get 50 offers out at a time, physically inspecting that same number of properties before making an offer is a time waster. Option 2 is the more practical approach, because we're only spending time looking at properties the bank has indicated it's willing to counter on.

With irregular, if not "onesey-twosey offers, we can theoretically "afford" to go do pre-inspections of properties, and then make fully informed offers. That's nice when it's practical, but it's a poor expenditure of time when we've got 50 offers cooking at once.

So...if we've got lots of irons in the fire, the only way to be efficient is to make the offers based on Option 2, and then upon a counter offer, go inspect. Lots of lenders won't counter. So, we don't want to have wasted valuable time looking at properties where the bank hasn't indicated an interest in negotiating.

  • Be willing to wait patiently for the bank to wade through the amateurs. After the listing is stale and the bank's gone through a couple failed escrows, we start looking like REALLY good alternatives.
  • Again, be professional and friendly. Bank employees will find us to be a breath of fresh air, when we relate with them in a friendly fashion (specially when they've rejected our offers). Rejected offers DO NOT MEAN "dead" offers.
  • Again, we want to be the last man standing. This means that if we're patient even after being ignored for a "better" offer a couple, two, or three times in a row, we'll still be there with an offer in hand...and much more likely to win a closing after the dust settles.
There's more to be said, but that'll have to wait. A mind can only absorb what the butt can stand sitting to read.



MattJohnson said...

Hey, I think I bid on that house in the picture!

J/K; excellent post. I'm just starting to work my way into foreclosure-land, and you're absolutely right: it definitely takes time and consistency to get into the lender's "circle of trust" and get at the juicy deals.

Jay said...

Ha! That house is a "juicy" short sale candidate, huh?

Tony Alvarez has organized my thinking and strategies in getting the inside track on REO prospecting/investing/wholesaling.

If you have the opportunity to hear him, he's got a gripping story to tell, and some rich experiences to share on why relationships are the key to super-success in the REO business.

Most investors, evidently, don't want to the spend the time necessary to develop anything more than a "business" relationship with REO gatekeepers. I hope they never catch on!!!! :D

Jay Palmquist said...

Something really important that I needed to include in this post... It's about the earnest deposit. There are lots of Buyers with cash that have spent the time proving their ability to buy consistently. Notwithstanding, the "whale" REO Buyers are plopping full-price earnest deposits down. That means gone are the days when we put up $2,000 as an earnest deposit on a $150,000 rehab candidate and expect the bank to take us seriously. Wrong! Today, in order to compete, after we've proven our ability to buy, we need to blow the amateurs away with full-price equivalent earnest deposits. Bank will go with our "sure" deal, over the "better" deal more often.

Bob Smith said...

That makes no sense. There's no way you can have 50 offers out if you have to put up the whole purchase price up front with every one.

Jay Palmquist said...

Yes, it makes perfect sense. You only make offers on what you're prepared to buy for cash.

Otherwise, it would make no sense to make 50 cash offers, with no cash available. You do what you can, not what you can't.