According to a 2012 RealtyTrac survey, U.S. banks own more than 600,000 foreclosed homes. Fannie Mae and Freddie Mac own more than 200,000 more. None of the owners wants to own these homes for any longer than necessary; their expressed preference is for selling in bulk. For well-heeled investors, bulk-buying presents a real opportunity, but one not without risks. For smaller investors, the process presents more difficulties.
Show Them the Money
Have serious capital in the multimillion-dollar range or find wealthy financial backers. If this sounds daunting or just plain unrealistic, consider the problem from the REO owners' viewpoint. REO stands for "real estate owned," a somewhat awkward acronym referring to real estate owned by banks and organizations such as Fannie Mae and Freddie Mac. In an AOL article on REOs, Donna Robinson, a real estate consultant, predicts that the foreclosure pools will typically hold a minimum of 500 properties. Smaller pools, Robinson said, just aren't worth doing. Even if the pools held 1,000 homes each, it would take more than 1,000 very large investment groups to handle all the REO owned by banks and the two quasi-governmental agencies.
Be a real estate professional or partner with one. According to an Inman News article on the qualifications for bidding on REOs, Fannie Mae, Freddie Mac and the FHA are looking for bidders with extensive professional experience, particularly those with experience in troubled areas with a higher-than-average concentration of REOs. If you have capital, but lack experience, consider partnering with a real estate professional. Avoid paying for lists of REOs -- banks have plenty of lists of their own REOs, and they are free. Finding REOs isn't the problem.
Work with nonprofits and local housing agencies. If you or your investment group have the experience and some capital, you may find additional capital and gain credibility by working with these groups. The federal agencies have announced that they will give preference to bidders with a record of working with nonprofits and community-based organizations, so that the sales will eventually have a positive effect on communities and local real-estate values. Bidders on federally-owned REOs should also be willing to convert REOs to rental housing and to manage it afterward. Federal agencies' strategy for making a positive impact through REOs is, first, to get this housing off the market, where foreclosed housing has a depressive effect on other housing prices, and secondly, to help contain rental housing rates where the unusual number of former homeowners looking for rental housing has temporarily driven up rental costs.
Borrow From Owners of REOs
Borrow from the banks holding REOs. If you, or an investment group you organize, can demonstrate to a bank that you have the capital and the experience to turn REOs back into marketable real estate, banks holding REOs are willing to lend you money to buy them. From the banks' viewpoint, this serves several good purposes: It gets the REOs off their books, creates a relationship with a viable borrower and helps restore property values in depressed communities.
Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.