Wednesday, October 21, 2009

Bulk REO, Fact vs. Fiction: Part III, "Where Is All The Inventory"

Maybe you've seen this scenario: a "broker" claiming to have access to Billions of dollars worth of REOs for sale at 40 cents on the dollar (or less). And if you are/were like me, you asked yourself: "Is this for real? Could there be that much inventory? And more importantly, is there anyone really buying or selling that many homes?"

When I first started "chasing" Bulk REO I was already an experienced and successful Realtor both residential and commercial. Yet after many months of chasing these "unicorns" I realized just how ill-informed, dare I say gullible, I really was (it went so far as I was on several fee agreements for multi-billion dollar bulk REO deals). Of course I had no control of the buyer or seller, couldn't verify a thing, and just sat around hoping and praying these deals were real. They weren't; ever, and I got quite disheartened and quite dis-illusioned at the whole thing! So I started doing research to educate myself. Just how many homes were there in foreclosure in the United States? And what were they really worth? And most importantly was ANY entity out there selling or buying them in such large blocks and at such steep discounts?

According to RealtyTrac there are approximately 1.5mm foreclosed homes listed for sale. They are listed with REO brokers around the nation and anyone can look them up. Additionally through various sources I have been able to detect about another 3 million homes that are in, or are going into foreclosure this year.

How many of these 3mm are now represented in the 1.5mm listed on RealtyTrac I have no idea but it's safe to assume a certain percentage of them are already REO and the rest are somewhere between NOD (notice of default) and REO. Some predict foreclosures will be at or near this level again next year as well.

So with a little bit of 5th grade math I've figured out the following: Using 2 million homes as a base (which would mean there are at least 500,000 homes not listed on RealtyTrac but are REO and part of this years 3 million, as well as at least another 1 million somewhere between NOD and REO, also not represented on RealtyTrac, to say nothing of where the 3mm foreclosures from last year might be) and $150,000 as the current median home value in the US (which is low and conservative) we come to a total of approximately $300,000,000,000 in BPO value of ALL the homes either in or going into foreclosure in this country. This number may be much higher. I don't think its any lower.

So it seems there are hundreds of Billions of dollars worth of several million REOs in this country, many for sale. And it seems there are anywhere from 500,000 to over 1,000,000 more homes, somewhere in the foreclosure process, but not "listed" anywhere. So where are they? And are they for sale? And more importantly, are any of them for sale in bulk, at a discount? (for our purposes I am using the word "discount" here to mean under 60 cents of current BPO)

Today, if you call BofA/Countrywide, Wells/Wachovia, FDIC, FNMA, and many other of the top banks, you will discover that by and large they DO NOT SELL THEIR REO INVENTORY IN LARGE BULK POOLS AT A DISCOUNT. As of recent for example, BofA is "one off" retail selling their REO inventory at or near 90% of BPO. The same for FDIC and FNMA (I encourage you to take the time and call them yourself. Remember don't take my word for it, go find out for yourself. LOOK DON'T LISTEN).

About once a quarter I have seen FNMA release bulk pools but they have been relatively small, by bid, and from my observation not premium homes or locations (my guess they are the homes they couldn't sell retail through their REO brokers network). I've seen the same from Wells and a few other banks: sporadic releases of small bulk pools of what I'm guessing are homes they couldn't sell through REO brokers. I have also seen larger bulk pools of "rust belt" that are trading cheaply. Homes in the 5000-10000 range, and even cheaper. But if the inventory is so large as my math above seems to demonstrate, then shouldn't there be more bulk deals?

(BTW: If anyone that reads this can prove in writing they did a trade with any of the Majors above (or any other entity) in BULK (and not "one off" contracts) at a discount greater than 60% then I will gladly "eat crow" (and you will become my new "best friend")).

So if the major banks are sitting on hundreds of thousands if not millions of foreclosed homes, are not selling them in large bulk pools at significant discounts because they are getting near retail pricing on their "one off" sales, then are there any Bulk trades being done?

And where are the 500,000 to nearly 1 million homes not listed on RealtyTrac but reported? Are they all between NOD and REO?

And if these numbers are so large (the largest since the Great Depression by some accounts) then can the banks continue to "one off" sell them? Or will they need to bulk sell them at some point, at significant enough discounts, to entice "private capital"?

I will take a stab at answering some of these questions in my next post.

(Part IV coming soon)

Tuesday, October 20, 2009

Bulk REO, Fact vs. Fiction: Part II, "Documents, Documents, Documents"

How many times have you seen this scenario. "I have a Bulk REO pool of 100mm in Southern California at 50+3, simply send me an LOI/NCND/POF/MFA and I'll send you the tape".

I'm sure like me, you've gotten dozens, maybe even hundreds of such emails, many even with an excel spreadsheet listing all the homes in the pool.

First, my client and I check the pool, and invariably MOST have anywhere from 5 to 10 different banks listed as "owner". How can a single pool be sold by a single "seller" (an entity that can legally convey title) when 5 or 10 different entities show up on title as the legal owner. The answer is they cannot. The only entity that I know of that can sell multiple bank assets is the FDIC and only from banks they have taken over. But as I covered in a previous post, the FDIC is not currently bulk selling. I know. I've tried, several times, through several channels, and each one has confirmed the same thing. They sell on a "one off basis" with a separate contract for each home, and they are getting near 90% of BPO. My client recently bid on 90 homes from the FDIC and they accepted 7 homes at a below 70% discount. And each have to be bought separately.

"LOI": Stands for Letter of Intent. In my career as a Commercial Agent I have drafted hundreds of these documents. They are offers, non-binding, and spell out basic transactional terms. They are signed by the buyer and seller as an agreement to business terms, and is the precursor to a PSA (purchase and sale agreement). In the Bulk REO world I have seen all sorts of LOI "templates".

"NCND": Non Circumvent Non Disclosure. I have a stack 2 feet thick of these, and I don't sign them anymore (neither do my clients). How many times have you been told "just sign my ncnd" and I'll get you on with the "seller". Upon which you are put on the phone with another broker, given another NCND and the cycle repeats. I can appreciate an "intermediary" wanting to make sure they get paid, but in this business, due to the chains of people (usually unlicensed and without a clue) these documents have become all but meaningless. I have personal relationships with my clients. I have their respect and loyalty. I don't worry about being circumvented. But in the Bulk REO world the norm is a chain of brokers, from across the country, none of whom have asked the right questions, qualified the deal, gained access to a "seller of record" (on title and legally empowered to convey that title at closing) who demand that their NCND get signed up front. RED FLAG.

The real deals I have worked on go as follows. My client gets an asset pool and verifies the owner (via title search) gets on a call with that seller to discuss it, an indicative bid is modeled and submitted which includes the broker fees, and if the principals can come to terms, a PSA is drafted. What happens if the seller wants 63 cents and the buyer underwrites at 64.5 cents but was forced to sign a 3% "fee agreement" up front? We all want to get paid. But the deal is worth what it's worth, and any Lic RE agent will tell you sometimes to make a deal, OUR commission becomes part of the negotiation. Invariably though there will be a "fee bully" in the mix who has some inflated idea of their importance in a deal, and the deal dies over "broker fees". I am all for "defending" my commission. But at the end of the day the banks want what they want, and the buyers will pay what they will pay, and if you can get them to agree, and there is something left over for you, do you take the deal, or let it die because it's not 3%?

"MFA": Master Fee Agreement. In a standard Real Estate transaction, the "listing" broker has established the fees to be paid up front in their listing agreement with the seller as well as the fee sharing with the cooperative broker. In the REO world, most banks also have an established fee they will pay Lic Brokers who consummate an REO transaction. Sometimes the fees are "added" to the net. The bank wants X the buyer will pay Y and the difference goes to the brokers. If your lucky, you have a deal where a full 3 or 4% is available. But this isn't a "set in stone" principal. So when I get a deal where some "broker" (again usually unlicensed and ill-advised) is dictating fees, I usually walk. They've never closed a deal anyway, and don't have control to begin with. So the first thing to check, once you have a real seller, is whether there is a fee being paid by the bank (or if a private seller, them). If not, then a discussion of fees with the buyer is in order, but in my experience this never takes place OUTSIDE the context of the deal.

"POF": Proof of Funds: Here is the biggest fraud that I've seen in this industry. ANY BROKER ASKING FOR A BUYER TO PROVIDE A PROOF OF FUNDS UP FRONT WITHOUT FIRST PROVIDING AN AGENCY AGREEMENT OR POA/LOA FROM THE SELLER/OWNER OF RECORD SHOULD BE SUMMARILY DISMISSED. When I list and sell Real Estate, my name is on the listing agreement, and my "authority" to ask for such a document is easily verifiable. The same is true in a Bulk deal. Only the seller of record or their fiduciary agent has any business asking for let alone recieving a POF from a buyer. So if they aren't a fiduciary agent (and prove it in writing) and ask for a POF, RUN! There are many Fiduciary Agents (real sellers "reps") out there. These companies routinely get hired by and sell distressed debt on behalf of financial institutions. And there are ONLY 5 (there were 2 when this post was originally written) authorized to sell FDIC debt from banks in Gov't receivership. But if some "broker" is claiming to have authority to ask for POF from your buyer, ask him to PROVE IT in writing. If he won't, no matter what the story, I suggest you RUN!

Monday, October 19, 2009

Bulk REO, Fact vs. Fiction: Part I, "Tangled Terms"

Like many of you, I have been working in the Bulk SFR REO space. I started in August of 2007 and in the last 2.5 years have spoken to probably 1000 people or so. Here are some of my observations.

“Brokers”, "Reps", “Mandates” and "Intermediaries"..Oh My!

Jargon, all professions have it. But what does it mean. And more importantly, is it even real.

I am a Lic. Real Estate Agent in the State of Florida and have been since 2002. I spent several years selling homes, and moved into the commercial space in 2004-5 where I specialized in selling apt bldgs (large and small) to Condo Converters. When that market dried up I moved into distressed asset liquidation. Thus my title is Lic RE Agent or loosely “broker”. When I was a dues paying member of NAR I was also a “Realtor”.

What I have noticed is the majority of the people I have met in the Bulk REO or distressed asset space are not Lic Real Estate professionals. In fact they aren’t Lic. in anything at all. They call themselves “entrepreneurs” or “investors”, or some other euphemism. And while I can appreciate and even encourage such a spirit, it is the lack of formal training in Real Estate that has caused much heartache. Let me explain.

As a Lic. real estate professional I must learn Law, Standards of Practice, Ethics, etc, and renew and update this knowledge every 2 years. An unlicensed person learns none of these things and unfortunately most of the unlicensed people I have encountered are seriously lacking in one or all of these categories. This isn’t a slight to them, but a “heads up” to the rest of us. The first question you should ask anyone you are working with is are they licensed in anything? This will tell you a lot about their knowledge, experience, understanding, and even possibly ethics level. This doesn’t mean if you are dealing with a Lic. Individual that all will be roses. I routinely get inaccurate information from other Lic Agents, not out of malice, but out of the na├»ve or inexperienced viewpoint of forwarding data without first verifying it. IF SOMETHING ISN’T WRITTEN (BY THE SOURCE), THEN IT ISN’T TRUE.

“Mandate”: This is the most misused term I encounter. The term mandate is used in reference to an act by which one individual empowers another individual to conduct transactions in that person's name. In this sense, it is used synonymously with Power of Attorney. As a Lic Real Estate agent I do have certain “powers” granted to me when I list and sell a property and there are different levels of representation I can be bound by (agency) one of which can even give me the power to execute a contract on behalf of my client. But that is a VERY rare instance. In the Bulk REO world this term “mandate” however is thrown around loosely to mean “any broker who happens to have a connection to a seller or buyer”. If someone claims to be a mandate or says they speak to a “mandate” I always ask one thing. PROVE IT. Show me the POA or agency agreement. I’m not an attorney but I do know it is fraud to claim to legally represent someone when you don’t.

“Intermediary”: This is a fancy term for a person in a chain of people. In that chain may be Lic Professionals, but more often than not it’s just a chain of “brokers” with no formal training, education, experience, licensing or expertise. Thus the information being passed on by one of these people is RARELY, IF EVER accurate. Why? It’s not because these people are bad, or stupid (although I have sometimes found both also to be true), but rather uneducated and ill-informed. Meaning they don’t know what questions to ask, and what to look for. When they are given an “outpoint” (piece of information that doesn’t make sense or couldn’t possibly be true) they don’t know any better to question it, or don’t know who to ask to verify it, and then forward it down the line as a “true datum”, passing from person to person, arriving to you as “fact” which upon a little due diligence, is just the opposite. Case in point: I have been presented with at least a dozen “opportunities” to engage “platforms” and other “selling entities” (non-profits, etc) that are somehow working with the FDIC in selling Bulk REO. One major outpoint. I have a former client that works for the FDIC and he has confirmed for me that the FDIC is not bulk selling REOs. I have verified this through several other channels, and I challenge anyone to prove, in writing, otherwise.

I have one stable datum in this business. If someone is claiming something to be true, I ask them to prove it in writing. If they can’t or won’t, I move on as it’s undoubtedly a lie. Maybe not their lie, but someone on that chain is forwarding false or ALTERED information and the person forwarding it to me didn’t know or care to verify it. LOOK, DON’T LISTEN is a motto to live by.

“Reps”: This is another euphemism for a person that speaks to a buyer or seller. They may or may not be licensed and most likely don’t actually “represent” anything (in the legal or agency sense).

"Partner": Invariably is just another intermediary on a chain of intermediaries. They may or may not be Lic. in anything and all above applies.