Is An Installment Sale The Same As Seller Financed Mortgage Monopoly on Bulk REO Avenue

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Monopoly on Bulk REO Avenue

Remember playing Monopoly and saving up to buy a fourth house so you could build a hotel to double your rent? What if you had the opportunity in real life to buy ten properties at once and start collecting rent from all of them? A plethora of bank-owned properties hit the market, giving wise investors the opportunity to make this kind of mass purchase (aka mass REO). Last year, banks sold hundreds of thousands of properties as mass REOs. This trend will continue into 2011 as record numbers of properties continue to be foreclosed on and entry costs remain low.

How low? You can get into the game with as little as $50,000 for a small portfolio of mass-flowing REO properties or as little as $100,000 for ten or more properties ready to be turned into wealth-generating cash machines. These homes are not in the world’s highest-rent Park Places, but in working-class Baltic Avenue type neighborhoods – giving investors the ability to buy ten homes for the price of one or two.

The first premise of the mass REO business model taps into a large market of underserved working class who earn enough to cover rent, but cannot qualify or save enough to buy a house (see “Why Good People Can’t Get Loans”). Working-class people are willing to buy homes and willing to make repairs—at a fair price. The price is equivalent to the rent. Makes sense. Let’s say the average rent in an area is $450. Offer the working person a seller-financed home for $450 or less per month and they’ll take the deal. And they will make payments because they already have a history of making lease payments. These loans are designed to succeed, not destined to fail.

The second premise of the mass REO business model is to provide a healthy cash flow with an interest rate of around 9.5% and an average term of 15 years.

Buying REO in bulk gives investors an opportunity to implement this portfolio building strategy. An active investor would buy 10+ homes and then resell them to the owner-occupant with seller financing (also called a land contract, contract for deed, or installment contract). The investor’s name remains on the deed for the duration of the agreement while the owner-occupant makes monthly payments. The owner-occupier also has full responsibility for taxes, repairs, and maintenance of the property. At the end of the term (15 to 20 years) the deed is transferred to the owner-occupant. Meanwhile investors generate significant returns on initial investment.

For example:

Wholesale purchase price $12,000 (one house)

Selling price $37,000

Down payment $1,000

Funded price $36,000 (15 years, 9.5% interest)

Amortized over 15 years $67,500

Minus the purchase price -12,000

Return on investment $55,500

Passive investors who want access to huge profits, but don’t want to set up a mass REO business to sell homes to individuals, can buy the business. They purchase land contracts and the underlying property from active investors who initiate seller financing and seek cash. These contracts are sold at a discount, which offers more advantages for the passive investor. For example, a 15-year, 9.5% interest contract with a face value of $36,000, earning $375/month, could be obtained for $26,500. During its term, the contract will earn $67,500; it is a 40% return on investment.

Buyer beware

The mass REO market is an exciting and fast-moving business, but as with any potentially high return investment, there are plenty of scammers. The internet is full of websites claiming to sell bulk REO listings (also known as bulk REO tapes); however, some of these lists are frauds, and others contain properties that are simply unsellable—burnt shells, vacant lots, and uninhabitable mobile homes. To navigate this challenging market, trusted guidance from a reputable listing broker is essential. Do your persistence. Ask for references. A reputable company will gladly provide more than five non-relative referrals! Find out about post-sales support and get it in writing. Ask about fees. Some companies hide their fees, others offer full disclosure, but all companies charge fees. Finally, take risks. The market for severely undervalued homes is drying up. Are you going to be the person with an income-generating portfolio to see you through your golden years? Or will you be the one to say, “If only….”

Why Good People Can’t Get Loans

1. Banks do not lend less than $60,000. The value of most homes owned by the bank is $50,000 or less. Without private financing, these homes will continue to be empty.

2. Many low-income families struggle to maintain good credit scores. Banks don’t like this. Savvy private investors know that a credit score doesn’t predict a person’s ability to pay a mortgage. Monthly payments are the predictor: loans at the right price are repaid.

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