Apr. 23, 2009 - Lessons from a REO Portfolio Transaction
Foreclosed properties create an immense pressure on financial institutions to dispose of assets in relatively short time while trying to get as much value back as possible. This process is frequently hindered by confusing and blurring important terminology. Negotiating REO housing portfolios for investors I have found confusion in the market over terminology among real estate professionals. When a broker negotiates a REO portfolio deals it is important to have a clear understanding of REO terminology and the different mechanics motivating by different sellers.
The problem we first encountered in trying to acquire a government REO portfolio was there was no system or mechanics in place for investors to group residential assets into a portfolio. Yet the advertising of government REO portfolios at the time where abundant and many brokers we talk to tell us of wild goose chases they have been on.
We developed and negotiated a process to bridge two unlikely worlds which has been one of the many bottle necks in the process. The buyer thinks in terms of purchasing a REO portfolio as a real estate deal; the seller in this case handles the deal like a securities transaction, like buying T-Bills. This disconnect is often difficult for traditional real estate brokers to understand the additional costs occurred in assembling a portfolio. Since we began in October we have learned the market and many involved in REO assets are confused over a few reoccurring points, so I thought I would share a few of the main points of confusion I frequently hear.
First is the BPO (Broker Price Opinion). After looking at a number of BPO numbers for assets I have concluded a BPO is what the seller wants it to be in most cases. For example, a bank when requesting a BPO uses brokers which will give them the highest number on there books. We see BPO numbers which are consistently 30% higher then BPO’s we contract for. The reason is the timeliness of the BPO required when purchasing the assets from Freddie and Fannie, their requirement for pre-approved REO brokers to provide the BPO, and the different motivation of the seller; banks want to bid up the price while government see the asset as toxic. This makes the concept of percent off of BPO a poor indicator as to the actual discount from current market value when purchasing a REO asset and is the true discounted value of the asset.
Second is the difference between a bank and a government assembled portfolio. Banking regulations get in the way of creating a portfolio of housing REO’s. Banks do a work around that does not benefit the bank to create a portfolio. This is a time consuming process and limits the selection of inventory. As the assets are one off in reality the banks generally prefer to turn them over to brokers they have established relationships with to sell their distressed assets by traditional listing methods.
When we pool assets from Freddie and Fannie we first clear the notes held by F&F which are treated more as a security. At first the purchase of REO assets is closer to a financial transaction then a real estate transaction. When we pool assets we perform site inspection by certified staff to produce a BPO at each location. We process the security, converting the paper into an asset before we can process the assets as a real estate transaction. This involves a whole team of people to pull together a portfolio which we pay for. F&F do not cover any costs of sale.
Because most realtors think in terms a real estate transaction like you would on the MLS it is easy to get sidetracked on fees required to be paid to get the portfolio created bridging two very different transitions. One in the assembly of the portfolio and secondly the typical real estate transaction at the point of title transfer. This requires a number of different professional to handle the process.
The last point is if you are buying at the source all contracts are direct between Freddie/Fannie and the client, there would be no middle men in the deal. This is a key question to ask to insure your client is receiving the full benefits of the substantial discount for purchasing a portfolio.
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