The Great (REO) Opportunity

 

Sometimes we forget that banks are businesses much like other companies. And there are times when they make mistakes, just like other companies do at times. And (as we know) collectively the banks made some incredible lending practice mistakes (doozies) during the not too distant past…

Though hard to fathom now, the lending errors the banks made enabled a buying and building surplus which at the same time was fueling the expansion of a real estate property value bubble. And these exaggerated valuations, being both artificial and temporary, caused the bubble to eventually burst.

This painful period of history also evolved into another problem of a different form for the banks. The effects of their own poor lending habits over this time left them with an incredible number of nonperforming loans, properties foreclosed upon and even abandoned on the books. Collectively banks became owners of millions of homes themselves.

Naturally, banks are in business to lend money to people for homes. Their business model, competency and desire doesn’t include owning the homes themselves. Seizing, managing and reselling real estate properties to recover unpaid loan balances was never intended to be part of their line of services; at least not intentionally.

Combined, these factors have encouraged the banks to become very motivated and flexible sellers. They’re anxious to return once again to their normal lines of business. Hence, the great REO (Real Estate Owned) opportunity for real estate investors was revitalized.…

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Actually it’s more than merely an opportunity. It is that and it’s part of the overall solution. Vacant homes don’t serve much purpose for anyone. Without life in and around them the condition of homes deteriorates, negatively affects the value of other properties nearby and can even present danger. People should be living in homes, maintaining them and helping them to become positive contributors to well-kept neighborhoods. These homes need to find their way into hands of people who know what to do with them, who can create a “win-win” from a dilemma.

The win-win in this case is in the form of an investment opportunity for those with access to capital; whether that’s in the form of cash or an ability to acquire loans. The home is purchased from the bank at a highly discounted rate (50-70% of market value), renovated and subsequently rented to tenants. Because all of the associated costs, including closing fees, still allow the investment amount to remain well below the true value of the property, a built-in equity is realized immediately. The rents represent a positive cash flow for the investor and appreciation of the value of the property over time is probable.

So the investor gains (equity, positive cash flow, likely appreciation), the tenant has a nice home to live in, neighborhoods improve and even the local economies benefit from the business of renovating the homes. It’s a wonderful win-win solution to a very serious and, for many, an unsettling and life altering experience.

And because the banks are anxious to get back to business as (was) usual, they’re willing participants. They were a large part of the problem and they’ve become a significant part of the solution. It only seems fair…

 

ABOUT OCG Properties: Based in Redondo Beach, CA and founded by Mathew Owens, we’re real estate investors who help others become investors too.