REO Tapes: The Loch Ness Monster of Real Estate

Unicorns.  UFOs.  Big Foot.  Sasquatch.  Leprechauns.  The Loch Ness Monster.  Everyone has heard of them, but no one has ever seen them.  As far as I’m concerned, you can put REO tapes on this list too.

What is an REO tape?  It’s a package of foreclosed homes that a bank (i.e. Bank of America) or insurer (i.e. Fannie Mae) elects to sell for a discount.  The theory is here that by selling them in bulk they solve a big cash shortage problem in a short period of time.  The buyers of these tapes (usually hedge funds or private investors with deep pockets) pay from .30 – .67 cents on the dollar per property.  Sounds like a win-win right?  Absolutely!  That is, of course, you can find one of these tapes.  It seems like tracking one of these down is like finding the proverbial pot of gold at the end of the rainbow.  Here are a few examples…

Where Did the Houses Go?

I ran into a well-connected colleague two weeks ago at a seminar in Scottsdale and he told me that he was about to close a 182 property tape.  I asked if he was interested in wholesaling any of these homes to my investment group.  He said yes.  We spoke two days ago and the deal blew up.  Why?  52 of the homes in the tape had already been sold and 6 of them had no property tax records.

The Meeting

It took place in a posh conference room in the swanky Gainey Ranch area of Scottsdale just two months ago.  My business partner and I were introduced to a very professional gentleman, well-spoken and well-groomed.  He explained that he had connections at both Bank of America and Chase Bank.  He could find us one of these tapes consisting of properties that fit our investment strategy.  Two months, four emails and three phone calls later and still no tape…my last email to him, sent last week, still has not been returned.

Tapes or Trash?

Last July I met with a California investor anxious to have me help him with due diligence on a 16 property tape he had been offered by a private investment group.  Guess what?  All but one of the homes had already been sold on the MLS. 

In September of 2008 I was asked to do due diligence for a private equity fund on a 78 property tape from Fannie Mae.  38 of the properties were located here in the Phoenix metro area.  After conducting a quick search I found that 35 of these homes were listed on the MLS for LESS than the asking price in the tape.

Pie in the Sky

About two years ago I met with one of the leading REO agents in Phoenix.  With almost 200 listings at the time, I asked her what kind of discount we could get if I made an offer to purchase all of her Litton Loan listings.  She said none and then quickly asked me, “Why would they sell these homes to you for .60 – .70 cents on the dollar when they can sell them on the MLS for .88 cents on the dollar?”  It was a very good question.

So do these REO tapes really exist?  Of course they do (my Loch Ness Monster joke was intended to get your attention!)  But don’t you think that the bank is going to do everything they possibly can to sell them for top dollar (i.e. at the courthouse steps, on the MLS, at public auctions like REDC) first?  The homes that get bundled up into these tapes have typically been picked over like the bargain rack at Wal-Mart.  They back to major intersections, have power lines in close view, are in war zones or in the middle of nowhere.

Now don’t get me wrong.  I desperately want REO tapes to exist.  They would be great for my business.  If you can find me one I’m all ears.  It would be like Santa Claus came early (I know he exists because me and my daughters saw him at the mall last December.)

15 Comments

Filed under Investing

15 Responses to REO Tapes: The Loch Ness Monster of Real Estate

  1. I am a real estate professional in the Tampa Bay area and I had an interesting conversation with a Senior VP of Bank of America and the bank’s position is they would rather wait for the market values to come up than sell off at .60 -.70 on the dollar. They have already written off so much they would prefer to wait it out. In addition, they will also do an actual appraisal on the subject property and base their decision on what it would sell for under normal circumstances. At most they may come down 5-10%. I think your article is very accurate. I have an REO listing from Bank of America for their SE region and yes the majority of them are on the MLS. If I can assist your needs in any way, please contact me.

  2. freerealestateeducation

    Steve,

    Thank you for your excellent insight. It confirms what I’ve been experiencing first hand for the past 24 months.

    I appreciate you reading.

    Marty

  3. If you want properties in Maricopa County, AZ, just buy them at the trustee sale auctions. You can choose what you want to bid on and assemble just the properties you like. Our service represents investors at these auctions, provides a high quality daily auction list and runs title searches with reports for our clients. We also have a full service option where we do everything and you or your clients just provide the money.

  4. freerealestateeducation

    Jameson,

    We are doing that now. I bid on 40 houses at the auction this week and didn’t get any of them. The margins down there are dreadfully thin. Too many people bidding up the price of these homes. We’re flipping properties (we sold 8 last month) and since last July our spreads have decreased. It will be interesting to see how things play out over the next few months without the tax credit. New mortgage applications are down 35% since May 1st. Hopefully that will thin out some of the competition at the courthouse steps when investors realize the buyers for these homes are gone.

    Thanks for reading!

    Marty

  5. Marty,

    Saw your name in the email alerting new discussions and I stopped to read your article.

    I have a good friend that worked for over two years on the illusive REO tapes you mention and he never was able to close a deal.

    I’d love to catch up if you have the time.

    Darcie Newton

  6. freerealestateeducation

    Darcie,

    Thanks for further confirmation that these tapes are pie in the sky. You can email me at marty@risingsuncapitalgroup.com. Let’s talk!

    Thanks,

    Marty

  7. Very good article.Indeed the actual tape is someone like the actual short sale approval….elusive! I working on a similar project years ago and actually say a honest to goodness pool from FM…the problem was that any buyer that was interested had 3 days to perform….needless to say no one we were working with could move that fast….

    I think the odds of putting together a “actual buyer” that can proof up and an actual pool….I like to call them pools instead of tapes is like finding bigfoot in the forest!

    • A pool is correct! I am currently reviewing a “pool” sent to me and there is a lot of really bad stuff on it. A few hidden gems, but overall, dumps! It’s no wonder they give you three days to pony up. They don’t want to give you time to put in the leg work to look at the MLS or tax records for information, pictures of the properties, property condition, etc. In most cases, the land is worth more, but you can’t build anything on in because the compariables aren’t there to support new construction. The cycle never ends.

      • freerealestateeducation

        Steve,

        You are so right. I have a friend in Gary, Indiana that was asked recently to do due diligence for a hedge fund on one of these tapes. 3 of the properties in the pool were in his area. The bank had them valued at 90K and were selling them for 40K. My friend told me he wouldn’t have paid more than 10K for any of them.

        Marty

    • freerealestateeducation

      Richard,

      I appreciate the feedback. What I find a little surprising is that the banks are doing such an efficient job of liquidating these assets for the highest possible price. They have been careful not to flood the market with too many REOs and are creating bidding wars by leaving their properties on the market as active, even though they have multiple offers.

      If only they had been that strategic prior to the bubble bursting. It would have saved tax payers billions.

      Marty

  8. Marty,

    My client and I spoke and he was amazed at how bad these units were. We are looking for other opportunities. There is not an investor worth his weight smart enough to even think about buying this garbage. I think a lot of leg work and networking will find the hidden gems out there.

  9. Pingback: All Around the World News

  10. Kimberly Jones

    I work with a company that really does buy the REO packages and they allow investors to cherry pick their little hearts out. Buy 1 or 100. Cash is preferred Financing is available.
    It doesnt have to be so hard.
    Seriously.
    Kimberly Jones
    nolainvestments@gmail.com

    • freerealestateeducation

      Kimberly,

      Forgive me if I sound a little skeptical but I’ve been told this before. I’ve heard that banks aren’t selling REO packages in the Phoenix metro area because demand is so strong on the retail market. Why would an asset manager sell homes in a tape for .50 cents on the dollar when they can liquidate them one by one on the MLS for .88 cents? I would love for you to prove me wrong. Let me know what you need (letter of intent, proof of funds, etc.) and let’s get started.

      Marty

  11. thank you for this article. Now I know about REO Tapes: The Loch Ness Monster of Real Estate. I own Scottsdale AZ real Estate. this article really helps me about REO..

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>