Bulk REOs question

[Krishn JAISWAL]

I know where and how to get a single REO, I have been doing this for a while. How does BULK REO works? Where all one can find the bulk REO list or tape? Or in other words, how do we get the list of Bulk REO? What's the source?

[Dion DePaoli]

When a loan reverts back to a lender as REO, more often than not it already has an agent assigned to the asset. This is simply the way the serving companies work.

"Bulk" is a layman term having the same general meaning as "pool" in capital markets. Both terms only mean two or more assets. The usual misunderstanding from street level investors is that "bulk" or "pool" also implies some significant discount, like Sam's Club. Not true.

Additionally, there is no unit count which qualifies "bulk", as stated above. Bulk is two or more. You can purchase a pool of SFR at full retail, that is still a bulk trade, it can be 2 units or 200.

Confusion stems from the function that capital markets plays in the industry. Typically, institutional investors have larger amounts of capital to deploy therefore, the trades are bigger. When given a choice, a sales guy working on a desk at JP Morgan or alike, will choose to work with their capital market counter-party simply because the trade is larger, which also means more money for the sales person. They most often also have similar views and values on the assets due to their lack of involvement with the specific geography and ideas about repairs and improvements. The misunderstanding of motives at the investment banks fuels comments like, banks do not sell to street level folks. Not true. That said, most street level guys are not making their way to the capital markets desk at JP or Citi, etc. However, banks still want and enjoy offers from folks with lesser capital provided the price is right. Just like any seller would.

I suppose there might be some market resentment that floats around, where street level folks think the bigger guys are getting better discounts. Unfortunately, that is actually backwards. More often than not, a street level investor stands a better chance of achieving more desirable discounts one asset at a time than the folks purchasing pools of assets. In many cases, when purchasing large pools, the investor is actually paying up (paying more) for the assets than a street level investor could achieve. Again, this is more of a function of the capital markets than the asset class. Capital managers need to deploy their funds so they can collect their management fees. Idle, un-invested money is not ideal for capital managers. So many capital managers compete with each other on the pools, which also drives the price up of the assets.

Getting a list of "Bulk REO", well you can simply go to the HUD website or alike. There is your bulk list. Discounts on REO, especially step discounts are derived from property condition or title defects. Institutional investors and street level investors usually do not approach the matter of repair and defects from the same angle. That also creates a gap, making it hard for the parties to work together.

Large pools of REO do not trade often in the market since most of the firms who have REO have worked through the system to be able to maximize their value from the assets. So, when the investor finally owns the REO and can achieve a 90% recovery of market value, why would they take a lesser amount? (they wouldn't). Also, the big six, who hold most of the NPN going through foreclosure have a watchful eye on their standing REO inventory and take care not to create an excess in their inventory by slowing dripping the foreclosures into the market place and turning them into REO at their pace, not the desired pace of street level investors. Further eliminating the need to sell off in bulk in a capital positioning event.

As a street level investor, you can see a discount that is favorable in a pool of REO or any asset for that matter simply due to the capacity to allocate the purchase proceeds by the seller. When an offer on one property is $50, but the seller wants $55, the negotiations terminate as the price can be achieved. On the other hand, if two properties get an offer say one at $50 and the other at $60 and the Seller wanted $55 for each, then everyone wins because the Seller can allocate the $110 into each asset at $55. That is the real benefit of trading in large pools. There is more wiggle room to make things work than a single asset.

In all of the banks someone has some sort of P&L responsibility to the inventory. At larger banks, assets may be split among more than one employee. It is easier to make a deal on several assets with one manager than it is to strike two deals, one with each manager on several assets. This is simply due to how their P&L evolves differently and independent from each other. For instance, one manager can be ahead of projects by 20% and one behind on projections by 20%. The manager who is behind will have to seek a higher price, as he is behind whereas the manager that is ahead can make a deal since he is ahead as long as it makes sense.

Hope that helps.