It is imperative that the lender examine and thoroughly understand both the loan documents for the particular loan and foreclosure laws in the area where the collateral property is located.   Depending upon the various factors contained in loan documents and the nuances of state foreclosure laws, there are usually factors that dictate the timing of when a foreclosure must be initiated.Sometimes, a lender not foreclosing on time might result in heavy delays in the process, allowing further arrearages to accrue and possible damage to the collateral property.

When the decision is made to foreclose, the bank needs its foreclosure property department to step in immediately.  In a commercial bank, foreclosed real estate properties are referred to as Other Real Estate Owned, or “OREO,” as distinct from real estate owned and used in the operation of the bank, such as the main bank building and bank branch properties.  The equivalent term at savings banks is Real Estate Owned or “REO.”

Here are some guidelines for the successful management of foreclosed properties:

• Make sure that the homeowners’ or fire and extended casualty insurance is cancelled and that the property is added to the bank’s blanket insurance policy for foreclosed properties.(Note: I have seen homes and buildings lost to fires when there wasn’t insurance coverage, due to sloppiness in monitoring the transition.)
• Assign the responsibility for managing foreclosed properties to one person.  If the level of foreclosures is sufficient to occupy one or more people fulltime, then this person almost certainly must be a new-hire.  Don’t rely on the loan officers that initiated the problem loans to begin with to now miraculously solve the problems that they could not foresee in the beginning.It is very helpful to have some “distance” between the OREO/REO professionals and the borrowers.
• Once the properties are foreclosed or abandoned, secure them immediately.  Maintain a central key repository in the OREO or REO department.
• Keep the properties looking decent.  Do whatever is required to avoid deterioration of the properties.There are no buyers who enjoy unattractive properties.
• If the property has problems, find a specialist in buying and fixing up properties, and provide financing to make the deal workable and attractive.  Include a commitment to provide financing for the ultimate customer to whom the fix-up specialist will sell.
• Put up the “For Sale” signs immediately after the foreclosure.  (Note:  It is astonishing to me how many times I have gone into OREO and REO operations and found management amazed that a property has not sold, yet there is no “For Sale” sign on it!)
• Only list with a real estate agent if truly necessary.Your Department of OREO or REO will understand the property than any realtor, and your financing will be a major selling point to the purchaser.  You – not a real estate agent – control the financing offered.
• Chat with the neighbors who live near the property.Friends and family of the owner will often be interested in the property.  Your offering favorable financing might be the factor that tilts the scales in favor of a relative relocating close to another relative.
• Inspect the properties regularly, and document what you find.  Take any needed corrective actions immediately.
• Offer financing to entice buyers.Remember that once you have a sale, the property starts making money instead of just consuming it.
• Consider holding periods and the net present value of a probable future sale when setting a sales price.The “net” in net present value allows for the holding costs which include taxes, maintenance, and any expenditures such as carpeting and other expenditures that may be required for good property marketing.
• Take note of OREO / REO events and issues at meetings of the Board of Directors.  Directors often have market knowledge and contacts that can help with OREO / REO problems.

Getting all of these done can be quite a challenge.  It requires special expertise to initiate all of these various activities and to keep them moving toward the multiple finish lines

This article was written by a professional banking expert witness. He is a consultant and banking regulator, has successfully administered hundreds of millions of dollars of foreclosed properties including houses, condominiums, subdivisions, raw land, apartments, offices, and more across the USA.  He is available on a contract basis to discuss your bank’s particular needs at an expert witness services company. See all professional and legal expert witnesses with full C.V.’s.

Short Sale Fraud – It’s not a law; nor is it an official policy, but it’s definitely going to be a problem regardless. The latest opinion released from Freddie Mac on short sales presents legal and practical issues for short sale investors.

On Friday, April 16, 2010, the organization posted an educational article titled “Emerging Fraud Trends: Short Payoff Fraud.” Essentially, the article stated that a short payoff or a short sale can be considered fraudulent if the lender agrees to a short sale that already has a third-party buyer in place that is paying a higher amount than the agreed-upon loan payoff amount. This is a serious yellow flag for short sale investors who make their living negotiating good short sale deals with banks, then selling their new properties to other buyers for a profit.

The rest of the article detailed scenarios and red flags for “short payoff” fraud. The scenario involved a facilitator, whose description matched that of a real estate short sale investor, who negotiated a deal with a lender to short sale a home worth $80,000 with a debt of $100,000 for $70,000. The facilitator does not let the bank know that he already has a buyer ready to pay 95,000 for the property. When the transactions close – in this case on the same day – and the facilitator pockets the difference, according to Freddie Mac he has just committed fraud because he withheld information about a higher offer and causes Freddie Mac to take a “larger than necessary” loss on the sale.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. Flags include sudden default without explanation, borrowers current on other debts and buying entities. Additionally, they encourage people to look for an option clause in their purchase contracts that allow the buyer to resell the property.

Buyers, sellers and lenders all are encouraged to report short sale fraud the second they become aware of or suspect a second purchase contract for a higher price. This may not yet be a law, but the signs are not good when Freddie Mac has posted such a direct attack on short sale investors.

Real Estate Investing is a tough business right now. While the business of buying and holding real estate as a long term investment remains a legitimate and viable strategy for wealth building, profit is no longer guaranteed as it once appeared to be.

With that in mind, the astute real estate investor will consider some specific real estate investment concepts to complement the “tried and true” strategy of long-term buy-and-hold investment houses:

* Virtual Real Estate Investing – the term “virtual real estate investing” has multiple meanings, including the use of the internet to buy and sell property, and the purchase and development of internet websites as a means of generating revenue. With an objective analysis, one can see the conceptual similarity between physical real estate and internet properties including entire websites and even individual pages controlled on larger sites like Facebook, Squidoo and Google Knol. Increasingly, real estate investors are seeing the clear opportunity presented by developing web “properties” into revenue generating assets much like physical rental properties. This trend is on the rise and will continue for the foreseeable future.

* Hard Money Lenders– when real estate investors need cash funding for their deals, they frequently turn to hard money lenders who provide the needed funding in exchange for payment of up-front points and high interest rates. But in many cases, the real winner is the hard money lender who profits from a high-interest loan secured by very low loan-to-value ratios. For this reason, many well-funded investors are turning to hard money lending as an alternative profit strategy. Since the down-side risk for the lender is mitigated by an asset with significantly higher value than the money being loaned, the risk to reward ratio clearly favors the hard money lender.

It’s a different world in the real estate investment business. It would be very, very simple to think that the foreclosure crisis has caused the door of opportunity to be slammed entirely shut. Yet that’s simply not the case. When one observes the state of the real estate market, it is undeniable that fundamentals matter more than ever. For example, the selection of the local real estate market is of greater importance than ever, considering the huge disparity that exists among the thousands of real estate markets across the United States. Additionally, the role of regulatory compliance is greater than ever given the activist nature of the current presidential administration.

Without a doubt, there are very major challenges in today’s real estate investing market. But with some persistence, determination and creativity, there is still plenty of opportunity.

Real Estate Investing is a tough business right now. While the business of buying and holding real estate as a long term investment remains a legitimate and viable strategy for wealth building, profit is no longer guaranteed as it once appeared to be.

With that in mind, the astute real estate investor will consider some specific real estate investment concepts to complement the “tried and true” strategy of long-term buy-and-hold investment houses:

* Internet Marketing – The internet continues to grow at an astounding rate and its value as a marketing medium grows even faster. With the expanding influence of social networking and the ability of “normal” internet users to directly interact with each other, the internet has become a center of social persuasion and an extremely viable medium for “getting the word out” about products and services available to average people. The benefits aren’t reserved for large businesses, either. While the internet has become increasingly competitive in recent years, it’s still imminently accessible as a marketing medium even for solo entrepreneurs with a modicum of determination and education.

* Bulk REO – the prevalence of foreclosures in our economy has put mortgage lenders into a difficult position. With large pools of foreclosed properties on their books, it is no longer efficient for these lenders to sell their foreclosed properties one-by-one through real estate brokers. As such, mortgage lenders are increasingly opting to sell their foreclosures in “packages” to well-funded investors, at steeply discounted prices. Bulk REO investing is a rapidly emerging trend and will continue to be a significant tool for real estate acquisition and disposition until such time as the current foreclosure crisis abates and the foreclosure rate regresses to more normal historical levels.

It’s a different world in the real estate investment business. It would be very, very simple to think that the foreclosure crisis has caused the door of opportunity to be slammed entirely shut. Yet that’s simply not the case. When one observes the state of the real estate market, it is undeniable that fundamentals matter more than ever. For example, the selection of the local real estate market is of greater importance than ever, considering the huge disparity that exists among the thousands of real estate markets across the United States. Additionally, the role of regulatory compliance is greater than ever given the activist nature of the current presidential administration.

Without a doubt, there are very major challenges in today’s real estate investing market. But with some persistence, determination and creativity, there is still plenty of opportunity.

With more foreclosures now than ever before, America’s weak real estate market seems to set new dismal records each month. But smart real estate investors are turning these ‘lemons’ into ‘lemonade’ in an incredibly profitable new way.

The real estate investing strategy du jour is called ‘Bulk REO Investing‘ and is a real monster.

Consider with me, if you will, the fundamentals of the Bulk REO business.

Understanding the notion of Bulk REO’s requires understanding of the foreclosure process.

As a borrower becomes increasingly behind in his mortgage, the lender regularly calls and writes the borrower with default warnings and threats. After a certain period, the lender will then formally begin foreclosure proceedings. Between the formal beginning of the foreclosure process and the public auction is the ‘preforeclosure’ period.

To complete the foreclosure process, the property is auction to the public. The lender regains ownership of the property if there are no buyers at auction. The lender then categorizes the property as ‘Real Estate Owned’ – or ‘REO’ for short.

Local real estate agents are usually used to resale REO properties at retail price to the general public. But as a consequence of the weak economy, lenders are frequently selling their REO properties far below their actual value. However, the purchase of a ‘package’ (or group) or REO properties is the trade-off for receiving such great prices.

The recession in the United States has yielded huge profits to real estate investors prepared to take advantage. The most successful Bulk REO Investors will have a well-respected source of funding for their transactions. There are many sources of funding for these transasactions including: hard money and commercial financing, as well as non conventional sources such as hedge funds and private investors. Additionally, one man is becoming very well known in the field of bulk REO investing, and his name is Sal Bushemi of Dandrew Capital Partners, a hedge fund in New York.

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