The recession in the U.S. economy has resulted in more foreclosures than experienced by any other generation of Americans. Yet well-funded investors in real estate are seizing upon this opening to profit from an profoundly profitable new opportunity.

That opportunity is called Bulk REO Investing, and the opportunity is huge.

Take a just a minute to consider the basics of this highly profitable business.

To understand investing in Bulk REO, you have to understand the foreclosure process.

As a home owner misses a payment or two, the lender sends the predictable barage of threatening letters and warnings. The lender directs the subsequent timing of the actual foreclosure proceedings. The name for this period is ‘preforeclosure’.

When a defaulted property is placed up for auction, the foreclosure process is completed. If the property is not purchased at auction, ownership reverts to the original lender. 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. Yet with increasing frequency, REO properties are being sold for pennies or dimes on the dollar. The trade-off is that the buyer must purchase multiple REO properties in each transaction.

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

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Everyone feels the negative brunt of non-performing assets, not just the lenders.  Non-performing mortgages limit lenders borrowing power by up to 900% in many cases.  For instance, if a loan of $100,000 is in default, the lender is forbidden from borrowing up to $900,000 until the property is dumped.  Also, as the defaulted asset loses value the lenders must record the adjusted value, thereby taking a great financial hit.

(A quick note from the editor:  For related information, check out Bulk REO Investing.)

Banks have few options that buffer the burden placed on their books by non-performing assets.  Foreclosure is almost always the last action banks take.  These actions are pricey for lenders and start with exhorbitant legal expenses.  The outcome is pervasisve property management while it continues as REO (Real Estate Owned) property.  There is a higher chance that vacant REO properties will suffer damage further plummeting in value.  When selling any property there are expenses - from marketing to transactions that accompany selling real estate.

Lenders also face the issue of staffing.  It matters little that a lender feels the only option is to foreclose if proper staffing can’t be put in place to manage and unload these REO properties.  Since about 1994 there hasn’t been this kind of lending crisis in which REO experts have been axed at jaw dropping proportions.  Not to mention the fact that the US has few experts capable of handling bulk REO’s while juggling the task of managing them, protecting them and divesting them with a low margin of loss.

As quickly as humanly possible today’s lenders, bond managers and servicing agencies appear to be charting the same course: Get rid of those unstable loans even if it means selling at a loss.

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