Real estate tips and tricks from Armando Montelongo

What the Growing REO Management Business Means to Real Estate Investors

There’s been a big burst of activity in the REO asset management business recently. And that could mean some big changes for real estate investors.

REOs (foreclosed properties, “Real Estate Owned”) have been big business for several years now. But what’s been happening the last few months may be an indication that the foreclosure market will be opening up.

Big firms already in the business of managing REOs are acquiring smaller ones. Banks are signing deals with management companies. Companies are re-branding themselves to focus on what they see as the growing business of moving REOs. There’s even new software on the market to help automate the sales of REO properties, assets owned by banks or other financial institutions.

A Big Move in REO Supply?

So what does this expansion of the REO management industry mean? Is this an indication that the huge inventory of REO properties sitting on the bank balance sheets are going to begin getting released onto the market?

Some of the “experts” don’t think so. A recent report from RealtyTrac says paperwork delays will push up to a million foreclosure filings from this year to 2012. That’s on top of a projected 2 million this year and 2.9 million last year.

But there are also a lot of business signs pointing to a more steady release of REO properties coming later this year and into 2012.

  • Stewart  Lending Services, a subsidiary of Stewart Title Company, recently bought majority ownership in PMH Financial, which provides a wide  range of REO services. PMH has an inventory of around $2.5 billion,  working on behalf of financial institutions, investors and loan-servicing  companies. It has 100 employees around the country. Stewart, clearly, is getting ready to be a bigger player in the REO  business.
  • First  American Financial Corp., already a huge part of the real estate and  financial services industry, is developing an REO asset management firm and hiring people to fill dozens of roles.
    Homeland  Security Capital Corp., a government contractor in a range of areas, recently bought Default Servicing LLC, which provides REO liquidation services  from property inspection to broker assignments to closing services.
  • Just  this week, Executive Asset Management, the REO management branch of Default Resource, signed an agreement with United  Bank to handle the REO  process for the bank, which is acquiring assets from failed financial  institutions.
  • DRI  Management Systems Inc., a maker of real estate software, has released a program designed to speed up and reduce the costs of resolving REO assets. Much of  the process right now is done on paper.
  • Even regional firms are getting involved. A company called Helios Capital LLC  has re-branded itself as Helios Capital Advisors to focus on building its  position in REO, investment and commercial loan sales.

It might not be happening tomorrow, next week, or even next month. But the way businesses in the industry are investing their money points toward the increasing availability of REOs later this year and into 2012.

Profiting as a Real Estate Investor in This Market

An increase in REO supply is a good thing if you’re a real estate investor. But don’t expect a flood of new REO properties to suddenly hit the market, which could trigger a further decline of housing prices – by 10 percent or more – from their current floor. Neither the federal government nor the banks are going to allow that to happen.

But that’s OK. As a real estate investor, I have lots of tactics my students are using to make money in this market. Many of these tactics fall into two strategic categories:

  • Flip (renovate and resell)
  • Cash flow (buy and hold)

In both cases, this is a GREAT time to be a real estate investor. Streamlining the release of REO inventory will only help the market get better for us.

As flippers, real estate investors make money on the spread between a property in disrepair and what a rehabbed home would go for. Of course we’d like to see market appreciation of the property at the same time. But because the profit is made on the spread instead of appreciation, my students are making money as this market continues its bounce along the bottom. And as we make profits, the real estate market is stabilized with fully renovated homes where boarded-up properties would otherwise be.

And as cash flow investors, we now are able to pick up long-term-hold properties for pennies on the dollar. As the rental market continues to heat up in the coming years, that will bring excellent ROI with long-term equity appreciation while we satisfy the market demands of people who can’t qualify for a mortgage.

Streamlining the release of REO inventory will make things better on both counts . . . IF you have the right tactics and strategies in play.

Watch ALL the signs the market is giving you, not just what the mainstream media decides to throw at you. Get ready to take action, because business is going to be even better than it is right now as the backlog of REOs is freed up.