Contacting Mortgage Companies and Banks
As you learned earlier, it pays to contact local lenders, mortgage companies, and banks. As an active real-estate investor, you need to alert the REO departments of these companies that you're interested in their properties.
Most will automatically alert you of any new properties they have available. Personnel in the REO departments move on or change, so it is a good idea for you to make periodic contact. This is especially true if you stop receiving alerts or information from any particular REO office.
Lenders sometimes make sudden and dramatic changes in selling REO properties that appear inexplicable to the outsider. It is important to keep in close touch with your local lenders. This is particularly true if you have identified an REO property that you would like to buy.
Changing Inventories
Within the REO office of any lender, the inventory of REO properties can change dramatically from one day to the next. As an outsider, you never know what opportunities might be available.
An REO department might have only a few properties one day, but then suddenly double or triple the properties they have to sell within a day. This can happen easily when an investor can't close on properties already purchased or an investor (someone with multiple properties) suddenly turns properties over to the lender.
Inventory of foreclosed properties can suddenly increase at specific times of the year. This is usually because of when foreclosure auctions are conducted. Because of the auctions, the REO department takes control of additional properties.
Changing Positions
One of the most vexing issues of working with REO departments is their sudden change in attitude. As an active real-estate investor, you could be working with an REO department trying to purchase a property. Every concession or point is a major struggle. Then suddenly, without any notice or explanation, the REO department seems to change. They can't do enough for you, and they seem to be bending over backward to help you purchase the property for the terms and conditions you want.
Why do REO departments suddenly change their policy?
You don't know what happens behind the scenes. Management at the lender keeps an eye on the REO properties. For whatever reason, the lender's management team has ordered the REO properties to be liquidated as quickly as possible. The REO properties are now available at better terms, with bigger discounts.
It is just as likely that the lender's management declares it is losing too much on properties it owns and is selling. Therefore, the REO management orders a tightening of the sales of the properties. They demand harder negotiations so as to reduce their losses.
It's a dynamic of REO departments. A change in management can bring about a flurry of REO sales as a new manager tries a different approach to managing various aspects of the lending institution. Deals today disappear tomorrow only to reappear soon. It's nothing you, the real-estate investor, are doing to make the REO department treat you this way; it's just the way they do business.
Other business considerations can impact a lender's decision to sell a property quickly. Lenders are subject to periodic audits by federal regulators. Lenders are required to maintain reserves based partially on nonperforming assets, such as their REO properties. A lender may elect to eliminate some REO properties before an upcoming audit.
Ownership Creates a New Ball Game
Until the property actually becomes an REO, the lender cannot make money on the property. Because the foreclosure process is so closely controlled by state laws and court rules, the lender can only try to recover the money it loaned, as well as its collection fees and costs associated with collecting the loan. The lender will tack on every expense, fee, and any associated cost it spent during the collection process. But the lender is not allowed to profit during the foreclosure. All it can do is collect what it is owed.
Keep in mind that during foreclosure the lender cannot profit or take advantage of the defaulting property owner. After the lender becomes the property owner, it can sell the property for whatever it wants and earn as much of a profit as possible.
But that all changes once the lender actually owns the property outright.
Now it can do whatever it wants as the rightful and legal owner of the property. If the lender has $100,000 in the property and can sell it for $250,000, why shouldn't it? As the property's new owner, it can hold on to it, rent it, or sell it.
