Defaulted mortgages create a backlash whose effects are felt by not only the lenders, but the economy as a whole suffers as well.  A defaulted mortgage could greatly limit a bank’s borrowing ability by nearly 900%.  Lenders can be blocked from borrowing up to $900,000 on a defaulted loan of just $100,000, that is, until the property is divested.  Not to mention that, as an asset goes down in market price, the banks are forced to adjust the numbers accordingly and eat the deficit.

(A quick note from the editor:  For related information, check out Bulk REO Investing.)

Banks have few options that buffer the burden placed on their books by non-performing assets.  Only as a last resort will banks foreclose.  Lenders must face excessive legal fees over the course of this process.  It also generates sizable problems included with property management while the property is an REO (Real Estate Owned).  There is a higher chance that vacant REO properties will suffer damage further plummeting in value.  There are also the expenses of selling any real estate holdings that include transaction expenses and marketing.

Staffing is yet another issue lenders face.  Even if a bank believes that foreclosure is the only feasable answer it has to contend with employing enough people to manage and sell REO’s, especially if there are bulk REO’s on hand.  The last time a major lending crisis of this proportion took place was about 15 years ago when REO experts among the lending staffs were let go, much to the detriment of banks and buyers alike.  On top of this, the United States has few in-house experts at any of the larger lending institutions who can handle bulk REO’s which need someone to manage them, secure them and sell them with minimal loss.

As quickly as humanly possible today’s lenders, bond managers and servicing agencies appear to be charting the same course: Get rid of those unstable loans even if it means selling at a loss.

No generation in American history has ever experienced the number of foreclosures and defaulted mortgages as is happening now.  But challenge always gives rise to opportunity, and opportunistic realestate.BryanEllis.comreal estate investors are rising to the challenge.

The real estate investing strategy du jour is called ‘Bulk REO Investing‘ and is a a real monster.

Consider with me, if you will, the fundamentals of the Bulk REO business.

Understanding of the foreclosure process is central to understanding Bulk REO investing.

A home owner who misses one or more mortgage payments is faced with an ever-increasing volume of threatening correspondence from their lender.  The official foreclosure proceedings begin subsequently, as directed by the lender.  ‘Pre foreclosure’ is the name given to the time between implementation of the foreclosure proceedings and the public auction.

To complete the foreclosure process, the property is auction to the public.  If there are no buyers for the property at auction, the property is returned to the lender.  The designation of ‘REO’ (Real Estate Owned) is then attached to the foreclosed property.

Lenders have no interest in owning property, and thus usually opt to list their REO properties with a local real estate broker in hopes of a retail sale.  However, REO properties are now frequently sold for far less than their ‘book value’.  But the price of receiving such great pricing is the need to purchase multiple REO properties (a ‘package’) rather than individual properties.

Qualified real estate investors are increasingly finding once-in-a-lifetime opportunities in these REO packages.  Bulk REO Investors are most successful when they have a well-established source of funding for their REO packages.  Some sources of funding for these transactions are:  personal funds, hard money lenders, commercial lenders and non-conventional sources such as private investors and hedge funds.  One excellent source of funding for Bulk REO Investment transactions can be found here:  Bulk REO Investment Training.