Buying Bulk Bank REOs - An Introduction & Definitions

Most investors have heard of Bulk sales or Bulk Bank REOs. Briefly what this entails is a bank or other selling institution wanting to offload multiple properties in quantities larger than 2 (usually larger than 10 or even 100). The reason they sell in these quantities is to remove the inventory from their books AND without the need to individually list them with a local Realtor.

In any transaction their are up to 4 or 5 positions a person may hold. These positions include 1.) The end buyer - ie, the money person; 2.) the buyer representative - ie, the person bringing the Buyer to the table; 3.) The Seller - ie, an investor or bank offloading their inventory; 4.) The Seller Representative - ie, the person marketing the inventory through his / her network; 5.) The Intermediary - the person connecting the buyer rep to the seller rep.

Thus, anyone can participate in this arena. Either you know people with money or you know people selling properties or you know people who know people.

First we need to talk about some definitions.

TAPE: This is the list of properties that is being offered. Usually this will be in a very striped down format with the addresses, the basic info like bedrooms, bathrooms, etc. I suggest if you are an Intermediary that you do not give this to everyone. Once an investor sees your tape and sees it from somewhere else then it and you lose credibility.

NCND AGREEMENT: This is a standard Non Compete / Circumvent - Non Disclosure Agreement. This is a document protecting your position in the transaction. Usually the Seller and Buyer will not sign these but all other middle people do sign it. This protects you from being bypassed in a transaction

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LOI: Letter of Intent / Interest. This is a non-binding document stating a buyer has interest in a particular TAPE. This often allows them to gain more information on a Tape. It is completely non-binding but does have their name on it and shows interest.

POF: Proof of Funds. This is a document usually drafted by an attorney or banker indicating that they have the funds available to buy a particular tape. It does not show account numbers nor show how much they have in the bank. It merely states they have to capacity to buy a specific amount of properties. For example, a buyer may have $ 100M in the bank and is interested in purchasing a $ 5M tape. The POF will simply state they have the capacity of buying the $ 5M. There is no mention of anything greater than this amount. Proof of Funds can be either hard or soft. Ideally they are the same. The funds will be verified by the selling institution to ensure the person representing themselves as the banker is in fact the banker.

DAISY CHAIN: A daisy chain occurs when there are many intermediaries (including buyer and seller reps) on a transaction. Ideally there should only be 3 or less. When intermediaries start getting larger than this then this could lead to deals following through simply due to greed or lack of proper communication.

QUIT CLAIM: Many times these transactions will occur where the owner (investor or bank) will simply quit claim their interest over to you. By doing this then any other liens, like past due tax bills, will follow through to the new owner. Make sure you do your due diligence on each tape you receive. In some cases you will get a full Grant Bargain and Sale Deed. This ensures no other liens are in place. Just because there is a tax lien or other lien on a particular home or package does not make the deal un-doable. It just means that is the additional amount you will be paying.

BROKERAGE POINTS: These are the additional points added to each tape to pay off the intermediaries. Usually it is at 3 or 4 points and will be added to the actual purchase price. These points are shared by every intermediary, usually equally. Thus, as the daisy chain grows, the less money each person will make.

Now lets cover what each position does.

1.) REO SELLERS: These people are the banks, lenders, investors, etc. who have the properties. They call all of the shots. Buyers wanting things to be done their way will not get a deal. Sellers have the properties and will ignore people who do not follow their rules. Chances are they will be working through a realtor or other trusted individual to do all of the legwork to bring in the buyers.

2.) REO SELLER REPRESENTATIVES: These people are often called Seller Mandates. These are the people who market the homes on the behalf of the REO Seller. More often than not these will not be listed on the MLS. The Seller Rep usually have their own network of people they deal with who buy packages from them. They do all of the legwork in ensuring the deal flows smoothly once an agreed upon offer is in place.

3.) REO BUYER: This is the buyer who is often buying the deals with cash. Trying to get a loan or using transactional funding (borrowing money from a short term hard money type lender) will often black ball you from ever doing business with that REO Seller. The REO Buyer will need to show a POF from their banker indicating they have funds available. This REO Buyer can be in individual or a group of people. Regardless, they will need to show they are paying cash and can close within days (not weeks).

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4.) REO BUYER REPRESENTATIVE: Often the REO Buyer is too busy to follow every lead on every deal out there that may come to his / her attention. The Buyer Rep is the person who usually brings the Buyer to the table. This is the person who knows the person with money.

5.) INTERMEDIARY: Although both the Seller Rep and Buyer Rep are ideally Intermediaries, there is sometimes a need for an additional person (s) who connect these two parties together. This is the place where too many people can be involved in a transaction where a person knows someone who knows someone who is related to someone that knows someone. When you are in this position it is critical to be able to tell a buyer / seller rep how far removed you are from the other contact. This is much like "6 Degrees of Bacon" the movie game for Kevin Bacon. If you a true Intermediary it is best to be only 1 removed from either the Buyer or the Seller. This means you are direct to the Buyer Rep and the Seller Rep. Sometimes you may be 1 removed from one or both of these representatives. Try to keep that number to a minimum. The more intermediaries there are the more likely a deal will fall through AND the less money everyone makes due to everyone is splitting that 3 or 4% brokerage points / fees.