Where did all the good REO deals go?

Question

Is it me or is it harder to find good REOs in the last couple months? I'm looking to buy a few properties to flip and have had a hard time lately. Seems like REOs became more expensive while the retail market stayed the same or even got worse. This obviously creates a problem if you're flipping.

Maybe I'm not looking hard enough. Anyone having the same experience?

Maybe I'm not looking hard enough.  Anyone having the same experience?

Jeff S. · Answer

I donâ€™t think itâ€™s the banks.  In my view, the problem lies with demand.

Not three hours ago I received a call from someone who wanted to meet and show me his business plan, in anticipation of borrowing money.  (A business plan is always the tip-off.)  After a brief conversation, I learned he has no deals and no money, but a plan to get into flipping.  He wanted to borrow the purchase money from me (100%, naturally) and borrow the rehab money from â€œhis investors.â€  Of course, I politely refused.

Iâ€™m receiving more and more of these calls in addition from those who are buying at over 75% of ARV using some pretty severe hard money.   Last night at a RE club we met someone who is flipping two houses with two loans each and said she will likely lose money.  She shared that regretfully, she wanted to get in so bad, price didnâ€™t matter.  I know the room was filled with many like her.

Five years ago it was no money down on pre-construction.  Today itâ€™s REOâ€™s and short sales.   I really believe weâ€™re in a small flipping bubble that wonâ€™t last for everyone.  Meanwhile, the wannabes and over-payers are driving prices to ridiculous levels.  The banks, which seem to have an infinite supply of shadow inventory, could fuel this bubble for a long time.  As demand increases however, I can see them releasing more inventory thus stabilizing or reducing prices.  Or, the neophytes will simply put themselves out of business causing prices drop.  Problem is, there seem to be a lot of neophytes.

Jeff

Will Barnard · Answer

Mike, not sure about Nationwide, but your problem is consistant here in SO CAL, home of the REOs and here is my opinion of what has been going on.

Banks have been slow to get the REO's to market.
Banks took a more relaxed/delayed (for lack of better terms) process to foreclose during the holidays (Nov./Dec)
Many banks for the last 6 months have been testing the market and pricing even the messed up homes at full retail value.
Trustee sales over the last 6 months got very VERY competitive and investors were bidding up homes above 80% of value, this caused the banks to try pricing REO's higher.

I have no idea if I am correct or not, but I do know that times have been tougher to lock great deals so far this year.

That stated, I see a slight pick-up now and for whatever reason, I am now getting deals again.

Just locked a property for $250k with only $10-$15k in rehab and the exit will sell all day long at $400k, $419k likely. I'd say that is a grand slam deal.

Will Barnard · Answer

Jeff points out an interestinjg perspective, one that I agree with but did not mention in my original thoughts.

I think the mass "overpaying" has really hindered us savvy investors from getting good deals in quantity. Overpaying at trustee sales (which I did mention) and overpaying once they are REO's just to "get into the game" is foolish at best.

I am hopefull that enough will get burned and stay out and the balance wanting to get into the game can be educated by us all to not make the same mistakes the rest of the neophytes did.

J Scott · Answer

In my experience, REO availability and the seller's desperation to get rid of the inventory, tends to be very cyclical in nature, at least since the recession started.  Certain times of the year tend to be much better than others.

Again in my experience, December through February tend to be great times to pick up great deals, March through June tends to be much worse, July through September tend to be decent and then October and November tend to be dismal.

Could be my area or just my perspective, but that's what I've seen.

Mike Neyman · Answer

I'm thinking that one of the reasons we're encountering this is because more investors (both pros and newbies) are purchasing properties for long term holds.  They can afford to pay more for the property and spend less on rehab.  I do both rentals and flips and know that there is a big difference in what I would accept for a hold rather than a flip.

Daniil Kleyman · Answer

Ditto.  Seeing same thing here in central VA.  Last year, I exclusively bought REO's - literally stole about 5 properties from the banks, and a few more well under 70% ARV after all my rehab costs.

This year, not seeing squat.  Going back to marketing directly to sellers because there's nothing on MLS to look at.

Jimmy C. · Answer

I have not noticed much of a difference down here recently.  Of course we have a large amount of inventory to sell through before we have to worry about that.

Brandon Paul · Answer

"Iâ€™m receiving more and more of these calls in addition from those who are buying at over 75% of ARV using some pretty severe hard money. Last night at a RE club we met someone who is flipping two houses with two loans each and said she will likely lose money. She shared that regretfully, she wanted to get in so bad, price didnâ€™t matter. I know the room was filled with many like her."

So true.  people overbidding daily and  losing. but they were so happy they got the "reo" ... i am constantly calculating how much some of these "investors" are losing as i see their property dropping in price and margin diminishing to even and worse negative.

Chris L. · Answer

We are having the same issues here in Ft Wayne.  Banks do not seem to be nearly as desperate to unload inventory.
I tried to get some deals in December and they would not budge.  I put offers in on 15 Dec for a 30 Dec cash close.  The banks response was only to come down a percentage or two off of the asking price.
Interestingly though, one of the banks came back to us in January and offered enough of a discount to take the deal.  That one is now rehabbed and we will put that one on the market next week.
We are finding that we have to be persistent and make offers on multiple properties to get the houses that we want at the right price.

Where did all the good REO deals go?

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