$10M REO CA bulk package just for you!

Recently I received a call from a colleague regarding an REO bulk package he had received from a broker. The package was in Southern California offered at $6M or a discount of .60 off current value of $10M. My colleague asked my opinion about such a package. I told him that if it sounds too good to be true, it probably is.

Many of you know California, along with Nevada and Arizona are commonly referred to as the “Diamond States.” These states are not like other areas of the country. They are highly desirable and much in demand, hence the discounts are less than commonly found in other states.

Contrary to popular belief, many local investors in these areas are buying between .70 to .75, holding and renting or reselling to retail buyers for .85 to .90 on the dollar. Could they buy for less in these areas? Quite possibly if they were purchasing inner city low end units requiring significant renovations. Those properties you could pick up in the mid .60s.

Many of these successful trustee buyers know it is nearly impossible to buy a pool from a bank or Freddie/Fannie Mac. Those prices are typically between .78 to .83 of FMV. So, these investors bypass them altogether and buy at the trustee sales held at the county courthouses. Obviously, you need to know what you are doing when purchasing at auction (another blog perhaps to discuss later). The most successful buyers are purchasing 25 to 100 homes per month. They are doing so in Los Angeles and Ventura counties as well as in Phoenix and Las Vegas. Needless to say, they are doing well.

Let’s return back to this Southern California package for .60 of FMV. Is it the real deal? Probably not and here’s why. Depending on the bank procedures, these REO lists are distributed to several  brokers whose job it is to help move these properties individually in the local marketplace.

These brokers then offer these lists to other services, such as the one that contacted my colleague. The service then takes the list and breaks out the most desirable areas (e.g. California) and offers this sub-set to their investors as a bulk package. When offering it to a buyer, they usually mention that they have exclusive access to the buyer mandate representing the bank. Translation: it is the broker who obtained the list from the bank and provided it to the service. The service is offering this package to you as a bulk sale.

Along with the “package” you received, they include instructions for submitting offers. Most importantly, they tell you your initial offer needs to start at .60 of FMV in order to have a discussion with the bank but that the bank always reserves the right to counter. So, you do your due diligence by spending time ordering and paying for BPO’s. You then come back with an offer at the minimum acceptable price of .60 of FMV. The service “submits your offer.”  The reason I use quotes is that most of the time, the service NEVER submits the initial offer. It is an enticement to get the buyer to submit an offer that will never be accepted. It helps the service separate the real buyers from the tire kickers.

After 3-4 days, the service contacts the buyer to tell them the bank countered at .68 and that is the minimum acceptable price but still reserves the right to counter again. Although you are not too pleased with the delay in responding, you decide to recheck your numbers and determine that .68 may still be a good deal and agree. Now, the service tells you that in order to submit the second offer, it needs to be accompanied with a proof of funds usually made out to the bank.

Here’s a behind-the-scenes look at what happens after your “second offer” is submitted.

1. The service takes your POF directly to the bank and attemps to negotiate a bulk purchase with them as the buyer at .60 to .63. They need your POF to get the bank to authorize the sale and issue the purchase agreement. The service is attempting to double close and sell it to you at .68 and keep the spread minus closing costs.
2. The bank responds by saying that these properties were not authorized as a bulk transaction but on a per asset offer basis.
3. The service believes they have the financial leverage to negotiate a better price since they are buying quantity with millions of dollars. The bank should be grateful to get these properties off their books quickly.
4. The bank responds again saying that it is not an authorized bulk sale and that if they want to buy, they have to make an offer on a per asset basis starting at the original bank price of .80, which is usually the starting point with a bank for CA REO’s.
5. After some back and forth, the service realizes they won’t be able to get the package at their pricing. They come back to the buyer with another counter offer at .80. They will gladly take you directly into the bank but you will have to pay them plus 3 points if you decide to move forward. At this point, the service is attempting to salvage the deal by brokering it.
6. This is unacceptable and the buyer pulls out of the transaction.

Many of you will ask, how do I know this? Well, I have been on the receiving end several times with these types of transactions when I first started out with REO’s. I also spoke extensively with authorized bank REO brokers as well as a few bank asset managers who confirmed this off the record. I have yet to see a successful transaction structured this way.

How do you spot these types of transactions? If you are new to selling REO’s, it will be a challenge since you are not familiar with true discounts specific to a geographically area. The typically signs include packages offered at $50M to $1B at deeply discounted prices in the diamond states; request for LOI/POF/MFA prior to seeing any inventory; promises of providing inventory specific to an area. The big warning sign is asking for a POF that would be sent to the service and not directly to the bank. NEVER EVER provide a POF to any broker or service. I personally have the buyer proof funds via escrow with the seller’s title company. You will never hear me ask for proof of funds and when buyers offer it to me, I decline. I don’t want the liability or responsibility.

Here’s an actual solicitation from a broker I received this week:

“My reason for contacting you is that I have become direct (no one between me and the seller). The product is REAL!!! I guarantee you. They own or have access to over $50 Billion Dollars worth of product today! The Process is as simple as can be. All they need is a “Letter Of Intent” from the BUYER signed by the BUYER with a Contact number for the SELLER to call the BUYER. The LOI should have exactly what the BUYER wants. Type of Product, State by State or Nationwide.. If the BUYER is looking for CA or AZ, they can ask for that in the LOI, but know that Product in those two States is very limited at this time. The SELLER will not talk to anyone but the BUYER on the phone call. With permission, you can have a Master of Arm’s on the call, but, they are there to just listen and make sure everything is on the up and up. I can guarantee you this. They are 100% REAL!!!! And, they are 100% honest!!!! After receiving the LOI from the BUYER, the SELLER will call the BUYER, usually, the same day but 99% of the time within 24 hours. If, both, the BUYER & SELLER are in agreement after the call, the transaction moves forward. The SELLER will do the MFA & NC/ND making sure that everyone is paid on the transaction.”

I usually don’t respond to these solicitations. Personally, I think they are truly a waste of time and always ends in frustration. Surely, if any of you have actually completed a transaction of this size, I would love to eat my words, but you would have to provide documentation as proof.

So, how many of you have had this happen to you? Feel free to share your stories.

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Tagged as: Banks, Bidding, Bulk Package, Buying, General, REO