At present, all of the “gurus” are aggressively promoting a new course on REO investing. The problem with this is that those who are doing so seem to suggest that REO Investing is “a smart thing to do” in the present economic environment.
But is it?
I’ll answer that question for you now: REO’s can be a really great way to create profits. So who should invest in REO’s right now? I think there are a few requirements you should meet before investing in individual REO’s:
- You should be relatively cash-rich
- You should be capable of carrying your REO properties for several years in order to ride out the current economic storm (do not rely on the hope of “flipping” your deals - that’s a recipe for disaster)
- You should be very adept at analyzing properties (in fact, getting input from a professional real estate analyst would be a really good idea considering the market we’re currently facing).
If you can do all of those things, then investing in individual REO’s might make sense for you.
However…
…There are some reasons that REO investing may *not* be right for you. So I’d like to take a moment to educate you about REO investing from an honest perspective, and to give you a very low-risk alternative strategy.
So to begin with, an REO is a property that’s been foreclosed by a lender. There are lots of these available right now. Millions, in fact. So there’s not exactly a shortage.
In fact, I suspect there are more REO’s available right now than ever before in the history of our fine country. Is this a good indicator for you as a potential REO investor?
I suspect not. The mere presence of a record-breaking number of REO’s doesn’t inherently mean that the average REO deal is a good one. In fact, lenders are very motivated to do all they can to recoup their losses in any way they can. And for them, one of the best ways is to sell off their REO’s to wide-eyed investors who think they’re at the start of the next gold rush.
However, let me be clear: I do believe that REO’s can be good money makers. Recessions are wonderful things for people who have investment capital available. But if you think you’re going to make a fortune in the REO business without having some serious “skin in the game”, you need to think again (regardless of what any promoter tells you).
A better alternative is to focus on cash-generating strategies that don’t require your money or your legal liability. What you need is MONEY, not equity. Equity feeds nobody, particularly during a recession.
So here’s the smart way to play REO’s: (1) Never use your own money or credit; (2) Never accept any legal liability for any REO deal; and (3) Only get involved in deals with very high profit potential.
So how does a person do all of these things simultaneously? I can tell you this much: It’s not by diving in head-first into individual REO’s. I don’t care how good the deal looks. In this economy, a property you buy for “50 cents on the dollar” today could very easily end up being a property you sell for “30 cents on the dollar” tomorrow.
All I’m saying is this: Be smart. Use your God-given talents and abilities to make money from REO’s in a way that’s safe and smart.
The smartest alternative I’ve seen to the promise of REO Investing is to do “Bulk REO Investing” using funding from a third party. In fact, I have a friend who runs a hedge fund in New York, and that’s what he does: He works with individual investors (like you and me) who fundamentally serve as “bird dogs” for finding packages of REO deals. My friend’s hedge fund then purchases the REO packages that make sense and the individual investor gets paid an immediate (and significant) cash payment as a finder’s fee.
And the numbers are pretty big. By my calculation, a reasonably conservative payout received by individual investors (like you) when they bring a package deal to my friend is between $30,000 and $50,000. And you make that money without assuming any risk in the transaction, and without using any of your own money or credit. What’s more, he teaches you how to find these package deals from 3 separate sources that are totally “off of the radar screen”, so to speak.
I was astounded at what I learned in the webinar he did with us a few weeks ago. I mean truly astounded. I’d never heard anything like it in my life.
My friend’s name is Sal Buscemi. He runs a very successful hedge fund in NY, and that webinar was one of the best-received pieces of educational content we’ve ever offered. What I and the other viewers of Sal’s presentation learned was truly a new and fresh approach to REO investing in the mortgage meltdown era, except all of the risk is literally eliminated from the start.
For a moment, let’s circle back to the top of this article where I mentioned to you the aggressive promotions going on right now for the latest “guru course” on REO investing. I suspect that many people will get caught up in the frenzy of that type of promotion without really thinking about other alternatives to accomplish the same thing, but without risk and without using their own money.
That’s why I’d like to offer two highly valuable resources:
First, I strongly recommend that you watch the webinar that I did with Sal Buscemi. That webinar is recorded and available for you all of this week at this link:
Special Webinar: The Smart Way To Profit From REO’s
Second, I’m having a very special question and answer teleseminar with Sal on Thursday night. Of course, the teleseminar will be 100% free and I would truly appreciate your suggesting questions to me to ask on Thursday night. (Note - I’ll send you the telephone number for the teleseminar tomorrow via e-mail if you’re on my email list.)
PLEASE NOTE - I strongly encourage you to watch the Bulk REO Investing webinar that we recorded a couple of weeks ago. You are, of course, welcomed to get on the Q&A teleseminar on Thursday night regardless of whether you’ve already seen the original webinar, but I know for sure you’ll get a lot more from the Q&A session if you’ve seen the webinar. I’ll leave the webinar up for you to watch this week, but I strongly recommend that you watch it TONIGHT (Tuesday, March 10) at 9:00 PM ET. There will be some special content available this evening.
So, that’s all I have for you right now: Just think a little about whether REO investing makes sense for you right now. If you’ve got a lot of money stored away, maybe it does. But if not - and if you’d like to come out of this recession with a bank account that’s much fatter than when the recession started, I strongly recommend you take a look at the Bulk REO Webinar and join us for the Q&A session this Thursday evening.
If you’d like to suggest a question for the Q&A session, please do so in the comments area below. As always, thank you for reading http://RealEstate.BryanEllis.com!
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18 Comments So Far»
I’d like to know if your friend’s hedge fund is successful even though hedge funds are getting a lot of bad press lately.
I’d like to know exactly how it’s possible for individual investors to make money from Mr. Buscemi’s hedge fund. It seems really intriguing, but I don’t really understand how it works.
Bryan,
As always, thanks for the great advice.
REO and bulk REO investing may be the next real estate area to fall victim to the “greater fool theory”. I agree with your assessement of individual REO deals not being for everyone. But I have been involved with bulk deals in the last few months and you need to be just as careful with these. For example, just saw a CA tape from a major institution. The sales price is 55% of BPO/appraisal. Sounds OK so far. Only problem is that they are using BPO or appraisal that must be badly outdated. A quick check of actual sales in that area shows homes selling for less than the bank’s asking price. And this is one of those banks which is notorious for establishing an asking price of X and then once they get that bid, all of a sudden the price is bumped up another 10% or more. So while there is money to be made in bulk REOs, there is much caution to be exercised as well.
I think you’re 100% on the mark. This gives rise to a question I’ll be sure to ask Sal on Thursday night: “How can individual investors be sure that the “Bulk REO packages” they find are legitimate good deals?” Thanks for your comment! — Bryan Ellis
The link “Special Webinar: The Smart Way To Profit From REO’s” did not work for me. Has it worked for others?
Darrell - I think it is working for others, but if any of you are having difficulty with that link, please let me know. Thanks! — Bryan Ellis
Get transactional funding from a funder like ******* for a proof of funds. Put in an offer on REO’s for lees that 40% ARV and only make counter offers to 40% ARV. If accepted, market aggressively for a cash buyer that can close quickly;use the re agents list too. If you find a buyer during the inspection period, set up the double close; you can use a virtual closing coordinator. Use the marketing to build you buyers list regardless of if the deal closes. If you don’t find a buyer during the inspection period, walk away.
Or so I’ve read from some who say they’re doing it this way. Would this possibly be safer advise? Because what you said can apply to any re investment, so now I’m even more concerned about ever trying to get a deal done. Doesn’t seem worth the time, effort, or risk.
Tim - with the proper criteria, any strategy can be safe. My point is simply that in the present circumstances, it makes most sense to focus on strategies that do not put you at risk, and are able to create immediate cash income. But for investors who are well-heeled financially and in a position to make well-considered decisions, then there’s a lot more flexibility. My over-arching concern is that new investors may be tempted to think that flipping REO’s is a simple and reliable strategy at this time, when in reality, other strategies are far more suitable and probably more profitable in the long run. — Bryan Ellis
Is there any parts of the country they will not buy in?
Bryan, you are indeed the master of the understatement
“all of the “gurus” are aggressively promoting a new course on REO investing” Surely you jest! Thanks for you wise advice, and for being willing to “buck the tide.”
Good info. However, please keep in mind that these hedge funds are able to cherrypick only the most profitable deals because so many folks are submitting deals. They will attempt to use “seller financing” to close the deal, with minimum down. If the seller wants all or mostly cash, these funds will usually pass, waiting for the “golden” opportunity where they can’t miss a BIG profit.. They LOVE leverage and keeping their cash in reserve.
In the conection of the wide marketing of the “Proved REO’s Purchase System” I downloaded the “unique Land Trust Form wich was created by the guru’s attornye just for $3000. Then, after checking the document something hit me. I opened one of copirighted CD with forms from a six years old RE course purchased form a still known guru and what a surprice: nine pages, one by one word by word, paragrph by paragraph all the same. Do you think it is just a honest mistake?
joscarsch.
Have to agree with Bryan basically 100%!
If you want what I consider proof of this then look at Robert J. Shiller’s index of American housing prices. Even most people can see from his chart we are not out of the woods yet, not by a long shot.
For those with a more mathematical bend one can see we will be shedding about another 35% (likely more, I think) of housing value just to get to even.
When any economic value, be it stocks, commodities, housing, etc… gets too far from its long term moving average (adjusted for inflation) it will always fall back to the moving average over time. We have not moved back to the moving average but are headed there. The real question becomes will we stop at the moving average?
So having large capital and a firm strategy with a couple of firm backup strategies is the only way to proceed in this market. Catching a falling knife is always difficult and without a large capital to help catch it, parts tend to be cut off unexpectedly.
Therefore, in my research I see bulk REO’s as a way of reducing the initial cost and getting the price down closer to where it needs to be because it is closer to the real value of housing, not the highly inflated value of the last few years!
If any of you think the stimulus will do anything for housing prices, be aware it will mostly drive prices below the moving average instead of holding them artificially above the average. We will have to wait for the coming large level of inflation to drive dollar values up to what they have been.
Chris B
Bryan,
Thanks for the info. I have been receiving the promotional emails from every guru that has an email list. I’ve taken the stance that the bigger the promotion, the less useful the product. At this time I see the individual REO market perfect for the ‘buy and hold’ investor who wants to build long term wealth. But only if there is enough cash in hand to stay the course.
After watching the webinar, Sal’s program looks to be more viable to build cash reserves. My question for Sal, is it really so easy to give a bank officer the elevator speech and walk out with a commitment for a multi-million portfolio?
Still, I would like to give it a try. Is it still possible to sign up with Sal?
Bryan, Thank you for your detailed and valuable advise on short sales and REO’S. Last week I heard your guest speaker hedge fund manager (Sal Buscemi) If i understood him right he was saying he will pay only 47% to 49% on the dollar for bulk REO’S. The way he explained the whole program sounds very good, I would love to do it. but do you think is it realistic to buy properties from bank 47 cent on the doller.
Hi Yasin - thanks for writing! As I recall, Sal uses a more flexible approach than to set a specific limit of how much he’ll pay for a package of REO’s. In fact, he gave one example where he paid significantly more than 47 cents on the dollar because the lender provided a huge amount of financing for the package. In other words, he judges REO packages on a case-by-case basis. –Bryan Ellis
my experience been with banks if you offer them less than 60% of BPO or appraise vale bank will not even talk to you. unless propery has serious enviromental issues or needing of total rehab. I would like to know what part of the country banks are taking 47% of the BPO.
Sure, I’ll be glad to ask Sal about this - tune in Thursday! –Bryan Ellis
My question is that his maximum REO package is $ 5 million, What is the minimum amount.?
That’s incorrect. Sal says that many of the packages he buys are in the $5 Million range, but that is not the maximum he’ll do, as I recall. However, I’ll happily confirm this with him on Thursday evening. –Bryan Ellis
Thank you again for your time and great work. Yasin Arain
It’s my pleasure, and thank you for the honor of your time. –Bryan Ellis
I like the concept, but would like to have Sal provide the following:
1) the number of REO packages Dandrew has actually purchased through its finders (bird dogs); 2) average size of the packages and 3) number of finders that are currently working to find deals. I am concerned about the number of folks doing this business (competition), what it would take and how long it will take to actually get a deal done. Thanks, I’ll listen in on Thursday for the response.
Banks will sell to anyone who has verifiable cash funds and credibility. If your not familiar with banks, their method of operation and do not understand the lingo then stay away from courses promoting bulk REO purchases. If you’re looking to get involved with performing and non-performing assets and asking banks for recent tapes of product and then knowing what to look for on these spread sheets then these programs may be for you.
These hedge funds are looking for bulk distress sales and now that the government is in the business with their new bank partners, banks are still trying to keep their volume of toxic assets a secret from the public and their share holders. They’re willing to sell the junk but are still holding on to the crappy ones trying to ge 75 to 80 cents on the dollar..
REOs are a great way for people to get started and learn tried and true fundamentals of this business. I do agree with your advice about not using your own money, so you need to become adept at raising money from private lenders (using their IRAs or money they have removed from the stock market).
Otherwise, the same fundamentals will apply. You have to know the values of the submarkets you want to work in. And you do need to be prepared to be a landlord for a few years. But in most major markets, Section 8 Housing Authorities are BEGGING for more participating landlords and are paying very healthy rents. But the great thing about Section 8 is that the government electronically deposits the rent in your bank account on the 1st of every month. In this uncertain job market, that makes your income recession-proof.
Yes, you will have to do repairs to the house, but you should have this ability (at least estimating costs and hiring/managing subs) in your skill set if real estate investing is going to be a long-term career for you. And at the end you will have a few renovated houses with positive net cash flow ($400-500 per month) as a foundation to build on.
Hedge funds and bulk REOs for a newbie are just like the musical chairs game that we just saw come to a crashing end. You’ve just changed the names of the players. Know your submarket, how to estimate repair costs and what a realistic market rent is and you will find many, many deals out there that make sense. Real estate was never meant to be a “get rich quick” game, but it can safely be a “get rich slow” game.
From what I understand there is no risk to the investor who acts as a “birddog” , “Asset Finder”. The hedge fund decides if it is a deal or not and if it is and the “Hedge Fund purchases the package, the investor gets paid. Am I correct?
Is there any way to find out if there is someone already working with Sal in my market. I am in a mid to small sized market and I would think it would look bad to have us both calling on the same banks possibly on the same days.
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