Buying Wholesale Bank REOs: An Introduction and Definitions

Most investors have heard of massive bank sales or REOs. Briefly, what this entails is a bank or other sales institution wishing to sell multiple properties in quantities greater than 2 (usually greater than 10 or even 100). The reason they sell in these amounts is to get inventory off their books AND without the need to individually list them with a local real estate agent.

In any transaction there are up to 4 or 5 positions that a person can occupy. These positions include 1.) The ultimate buyer – ie the money person; 2.) the buyer’s representative, that is, the person who brings the Buyer to the table; 3.) The Seller, that is, an investor or bank that unloads your inventory; 4.) The Seller’s Representative – that is, the person who sells the inventory through their network; 5.) The intermediary: the person who connects the representative of the buyer with the representative of the seller.

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

First we need to talk about some definitions.

WRITE: This is the list of properties on offer. Usually this will be in a very simplified format with addresses, basic information like bedrooms, bathrooms, etc. I suggest that if you are a Middleman, you don’t give this to everyone. Once an investor sees your tape and views it from somewhere else, then he loses credibility.

NCND AGREEMENT: This is a standard non-compete/circumvention agreement: non-disclosure. This is a document that protects your position in the transaction. Usually the seller and buyer will not sign them, but all other intermediaries will. This protects you from being bypassed in a transaction

LAW: Letter of Intent/Interest. This is a non-binding document indicating that a buyer has an interest in a particular TAPE. This often allows them to get more information on a tape. It’s completely non-binding, but has your name on it and shows interest.

POF: Funds Test. This is a document usually drawn up by a lawyer or banker stating that they have the funds available to purchase a particular tape. It doesn’t show account numbers or show how much they have in the bank. It simply states that they have the ability to purchase a specific number of properties. For example, a buyer may have $100 million in the bank and is interested in buying a $5 million tape. The POF will simply state that it has the ability to purchase the $5 million. Nothing greater than this amount is mentioned. The test of funds can be hard or soft. Ideally, they should be the same. The selling institution will verify the funds to ensure that the person representing himself as the banker is in fact the banker.

CHAIN ​​OF DAISIES: A chain connection occurs when there are many intermediaries (including representatives of buyers and sellers) in a transaction. Ideally there should be only 3 or less. When brokers start to grow larger than this, it could lead to deals being made simply due to greed or a lack of proper communication.

EXIT THE CLAIM: Many times, these transactions will occur where the owner (investor or bank) will simply give up on claiming their interest from you. By doing this, any other links, such as overdue tax bills, will follow the new owner. Be sure to do your due diligence on every tape you receive. In some cases, he will obtain a completed dealership agreement and deed of sale. This ensures that no other links are in place. The fact that there is a tax lien or other lien on a particular house or parcel does not make the deal unworkable. It simply means that this is the additional amount that he will pay.

INTERMEDIATION POINTS: These are the additional points that are added to each tape to pay the middlemen. It is usually 3 or 4 points and will be added to the actual purchase price. These points are shared by all intermediaries, usually equally. Therefore, as the daisy chain grows, the less money each person will earn.

Now let’s cover what each position does.

1.) INMATE SELLERS: These people are the banks, lenders, investors, etc. that have the properties. They make all the decisions. Buyers who want things done their way won’t get a deal. The sellers own the properties and will ignore people who don’t follow their rules. They will most likely work through a real estate agent or someone else they trust to do all the legwork to attract buyers.

2.) INMATE SELLER REPRESENTATIVES: These people are often called Seller Mandates. These are the people who market the houses on behalf of the REO Seller. Most of the time, these will not be listed on the MLS. The seller’s representative usually has his own network of people he deals with who buy packages from them. They do all the legwork to ensure the deal flows smoothly once an agreed offer has been made.

3.) REO BUYER: This is the buyer who often buys the offers for cash. Trying to get a loan or using transactional funds (borrowing money from a short-term hard money lender) will often block you from ever doing business with that REO seller. The REO Buyer will need to show a POF from his banker indicating that he has funds available. This REO Buyer can be an individual or a group of people. They will still need to show that they are paying cash and can close in days (not weeks).

4.) REO BUYER REPRESENTATIVE: Often the REO Buyer is too busy to follow every lead on every deal that might catch their eye. The buyer’s representative is the person who normally brings the buyer to the table. This is the person who knows the person with money.

5.) INTERMEDIARY: Although both the seller’s representative and the buyer’s representative are ideal intermediaries, sometimes an additional person is needed to connect these two parties. 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 who knows someone. When you’re in this position, being able to tell a buyer/seller representative how far away you are from the other contact is critical. This is a lot like “6 Degrees of Bacon,” the Kevin Bacon movie set. If you have a true Broker, it’s best to only remove 1 from either the Buyer or the Seller. This means that you are directly with the representative of the buyer and the representative of the seller. Sometimes it can be 1 removed from one or both of these representatives. Try to keep that number to a minimum. The more brokers there are, the more likely a deal will fail AND the less money everyone makes because everyone is splitting that 3 or 4% points/brokerage fees.