What is an REO tape? It’s a package of foreclosed homes that a bank (i.e. Bank of America) or insurer (i.e. Fannie Mae) elects to sell for a discount. The theory is here that by selling them in bulk they solve a big cash shortage problem in a short period of time. The buyers of these tapes (usually hedge funds or private investors with deep pockets) pay from .30 – .67 cents on the dollar per property. Sounds like a win-win right? Absolutely! That is, of course, you can find one of these tapes. It seems like tracking one of these down is like finding the proverbial pot of gold at the end of the rainbow. Here are a few examples…
Where Did the Houses Go?
I ran into a well-connected colleague two weeks ago at a seminar in Scottsdale and he told me that he was about to close a 182 property tape. I asked if he was interested in wholesaling any of these homes to my investment group. He said yes. We spoke two days ago and the deal blew up. Why? 52 of the homes in the tape had already been sold and 6 of them had no property tax records.
It took place in a posh conference room in the swanky Gainey Ranch area of Scottsdale just two months ago. My business partner and I were introduced to a very professional gentleman, well-spoken and well-groomed. He explained that he had connections at both Bank of America and Chase Bank. He could find us one of these tapes consisting of properties that fit our investment strategy. Two months, four emails and three phone calls later and still no tape…my last email to him, sent last week, still has not been returned.
Tapes or Trash?
Last July I met with a California investor anxious to have me help him with due diligence on a 16 property tape he had been offered by a private investment group. Guess what? All but one of the homes had already been sold on the MLS.
In September of 2008 I was asked to do due diligence for a private equity fund on a 78 property tape from Fannie Mae. 38 of the properties were located here in the Phoenix metro area. After conducting a quick search I found that 35 of these homes were listed on the MLS for LESS than the asking price in the tape.
Pie in the Sky
About two years ago I met with one of the leading REO agents in Phoenix. With almost 200 listings at the time, I asked her what kind of discount we could get if I made an offer to purchase all of her Litton Loan listings. She said none and then quickly asked me, “Why would they sell these homes to you for .60 – .70 cents on the dollar when they can sell them on the MLS for .88 cents on the dollar?” It was a very good question.
So do these REO tapes really exist? Of course they do (my Loch Ness Monster joke was intended to get your attention!) But don’t you think that the bank is going to do everything they possibly can to sell them for top dollar (i.e. at the courthouse steps, on the MLS, at public auctions like REDC) first? The homes that get bundled up into these tapes have typically been picked over like the bargain rack at Wal-Mart. They back to major intersections, have power lines in close view, are in war zones or in the middle of nowhere.
Now don’t get me wrong. I desperately want REO tapes to exist. They would be great for my business. If you can find me one I’m all ears. It would be like Santa Claus came early (I know he exists because me and my daughters saw him at the mall last December.)