REO: Acquisitions and Real Estate Marketplace

Robert L. Labbé - June 03, 2008

May 2008 Case-Shiller Report Shows 14% Annual Decline:
Those waiting to call the bottom of the US residential real estate market likely welcomed the latest S&P/Case-Shiller U.S. National Home Price Index and the further market decline it evidenced. The report, released at the end of May, recorded a year over year 14.1% decline for Q-1 2008, the largest decline in its 20-year history. Fifteen of the metro areas reported record lows, with eleven in double digit decline. Las Vegas remains the weakest market, with a year over year annual decline of - 25.9%, followed by Miami at - 24.6% and Phoenix at - 23%. Charlotte and Dallas were up slightly, bucking the trend, and to no surprise the index shows that the markets that appreciated the most during the real estate boom are the ones that lead the year over year decline.

Timing a Real Estate Market Recovery:
In a recent opinion piece in the Wall Street Journal, New York Hedge fund manager Cyril Moulle-Berteaux argues that the bottom of the housing market is upon us. Whether this is the case or not will generate plenty of ink in the months ahead although calling a market bottom is likely premature in light of a still prevalent oversupply of housing inventory and a weak economy. Those preoccupied with timing an eventual recovery might be better served in any event by simply deploying acquisition capital in paced tranches over the next several quarters.

Where to Find Bank Owned REO Opportunities:
A clear byproduct of the housing dilemma currently available to real estate investors with access to capital lies in bulk REO opportunities available at very significant discounts to current fair market value, particularly for those who have stayed on the sidelines in the nearly three years since US home sales peaked in July 2005 and the credit crisis took hold in early 2007. REO properties can easily be found online from nationwide databases such as www.foreclosure.com and at bank websites such as Bank of America REO and Countrywide REO as well as a host of other lender websites. Bank REO homes will also be found on any MLS service. Investors will quickly realize however that deep discounts on REO properties will generally not be found on the property listings at any of these sites, other than nominal discounts one can obtain on single REO purchases from these sources. Better discounts are available at auctions currently taking place around the country. The best discounts however are available to bulk purchasers of REO assets – large REO portfolio acquisitions of from 50 to over 500 properties at severely discounted REO prices as was discussed in our May 19, 2008 article.

Acquisition of Bulk REO Portfolios:
Investors seeking to purchase bulk REO homes and condominiums can find solace in knowing that despite the frequent dead ends even the most sophisticated investors often encounter, such portfolios are indeed available from direct selling sources - provided one has all important access. Limiting the availability of bulk portfolios is the fact that a desirable REO portfolio will generally be available for a very limited time once it has been made commercially available by the seller, if priced right. A portfolio of 100 single family homes (SFR) in the right demographic area will likely be put under contract within a few days, if not hours, of its release by a seller. Letters of Intent (LOI) from a potential investor to a broker participating in a chain of so called ‘mandates’ will not be of much use to a buyer if a more informed investor working through a direct channel to REO sellers has already reviewed and placed the asset pool under contract with the seller the day it became available. The relative speed at which highly discounted REO pools are acquired requires an ability to quickly analyze the assets in order to make an informed decision on a multi-million dollar acquisition of “as is” assets within a matter of a few days or less. This requires a level of agility and quick decision making that few institutional investors, typically more adept in the commercial real estate space, are either capable of or comfortable with. Knowing how to conduct residential valuations, due diligence, property inspections, handling multi-state title issues and multi-asset conveyances, all while moving forward to a closing within a seller’s tight schedule presents additional challenges to a novice in this space. Nonetheless, all are prerequisites to an effective REO acquisition strategy in this fast moving marketplace where REO assets are sold quickly and efficiently (much like commodities) as lenders, seeking to clean up their bloated balance sheets, dispose of inventories of often very good, yet undesired and therefore undervalued REO assets.

Robert L. Labbé is President of MorCap Fund Advisors, LLC. He can be reached at rlabbe@morcapadvisors.com

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