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Bulk Buying Basics | By: Multiple Speaker(s)

Bulk Buying Basics
By Vena Jones-Cox


If you want to make money in real estate, why buy one property when you can buy 2, or 10, or 100, all at the same time, at even deeper discounts?

And if you’re a bank overloaded with REOs, why mess with dozens of agents fielding hundreds of lowball offers that have to be dealt with one by one, when you can simply package up dozens or hundreds of properties all over the country and sell them to a single buyer?

That’s sort of the theory behind the accelerating trend in “bulk buying” by Wall Street firms, hedge funds, and other companies.

In bulk transactions, large buyers bid on packages of REO properties (or sometimes, defaulted notes) offered by FNMA and by large and regional banks. When a particular company’s bid is accepted, they purchase the properties and then exercise whatever their particular exit strategy might be, from repackaging them locally and selling them to smaller bulk buyers, to renovating them and holding them for rental, to selling them singly to the public.

Sadly, bulk buying at this level is beyond the reach of you and I. It requires significant sums of cash (as much as $1 million+ per package); the deals are “take one, take all”, which means that the properties are often scattered all over the U.S.; there’s no time to do any real due diligence; and turning over the product requires a significant infrastructure of people and technology that most small investors (and, frankly, some of the bulk buyers themselves) just don’t have.

However, there are some amazing opportunities one level down from the “buy from Bank of America” level. Because a number of these companies are basically in the wholesale business, they often re-market their properties to local investors at a markup that can still allow you to make significant profits from their deals.

But buying from bulk buyers isn’t the same as buying from a civilian seller, or even the same as buying a listed REO from a bank. If you want to pursue this strategy, there are a few things you need to be prepared for:

Not all deals are deals at all. OK, maybe this is the same as buying directly from banks—but it’s important to understand what it is these bulk buyers are getting.

Typically, a bank won’t package and resell a property until it’s been on the market for a number of months and hasn’t sold. This is usually, of course, because of the condition and location of the properties. Since the bulk buyers must take everything in the package, you’ll see a lot of properties in warzones or semi-warzones; properties with structural problems; properties with such severe condition issues that they simply can’t be renovated at a cost that allows for a profit.

In fact, if you come into the process late in the disposition of a certain package, you may find that it’s been picked over to the point that all that’s left is junk that the bulk buyer would have to pay you to take—and they won’t do that, because they’d rather let the property go back to county for back taxes, or donate it for a $5000 write-off, or even let the entity (all bulk buyers have dozens of separate entities, often one for each package they buy) fold or go bankrupt than take an actual loss on any of the properties.

And, unfortunately, not all bulk buyers really understand what they’re doing or how to bid on these packages. I’ve run across several who, rather than getting packages at the 50%-85% discounts over current value they THINK they’re getting, have bought packages at full value and are now trying to dispose of them at even higher prices.

Nonetheless, particularly in the beginning stages of the disposition of a package, there are some great deals to be had; in the middle stages there are still deals that work, albeit at a lower profit margin.

On the bright side, there’s practically no emotion involved in the sale of these properties on the part of the seller. You can feel free to offer whatever works for you, even if it’s less than the amount that it appears that the seller paid for the property, without fear of offending them.

However, there’s a twist that you have to be very careful of:

You will be assuming all back taxes. When you buy a property from a bank through the MLS, you go to a regular closing at which the bank pays for any back taxes or assessments from their side of the proceeds. This isn’t true when you buy from bulk buyers: you will get a quit-claim deed (see below) and will be responsible for payment of any and all liens, fines, and assessments.

Before you make an offer to a bulk company, make sure you know exactly what’s owed and that you’ve subtracted this amount from your maximum allowable offer. The back taxes can be significant; I recently made an offer on a property that I can wholesale for around $25,000 on which my offer was $9,000 because it has nearly $10,000 in back taxes (including a tax lien) that my buyer will need to pay off at the closing. Since my buyer will want to pay a GROSS price of $25,000, I can actually only charge him $15,000 for the property.

You’ll get a quit-claim deed. In a standard real estate transaction, a property is conveyed to you via a general warranty deed (which means that the seller guarantees the marketability of the title) or, in the case of a bank seller, a limited warranty deed (which means that the seller guarantees the title back to the day it took possession).

In purchases from bulk buyers, you’ll almost always get a “quit-claim deed”, which is an instrument that basically says, “We’re not saying that we have any interest in this property, or the nature or quality of that interest, but whatever interest we DO have, you now get.”

Quit-claim deeds are a perfectly legal and legitimate way to transfer a property. They’re not even a particularly dangerous way accept transfer, as long as you’ve had a title search done and know what it is you’re accepting. The biggest problem with quit-claim deeds is that, in some states, they’re ‘uninsurable’, which means that you can’t buy a title insurance policy to guarantee the future marketability of the title.

Whether or not this is a big deal depends on how much money you’ll be putting into the property and what you intend to do with it. If you intend to hold it for rental forever, it matters very little whether there’s a 20 year old mortgage release that wasn’t properly drafted; if you intend to sell it to a first time homebuyer, that’s a very big deal.

High-pressure, ‘our way or the highway’ sales. It’s absolutely the case that you’ll need to be able to close quickly if your offer is accepted (see below). It’s also the case that you won’t be allowed an inspection contingency or a financing contingency: you need to have your money lined up and your inspections completed before you make your offer.

However, you’ll also be told that you need to bow to certain terms that simply aren’t acceptable. For instance:

You’ll often be told that you need to send the full purchase price to the seller within days of acceptance—but that the deed won’t be sent to you for 30 days or more. The reason for these “trailing deeds” is twofold: first, bulk buyers often begin marketing their properties after winning the bid on them but prior to actually receiving deeds from the selling bank; second, they are often so disorganized (see below) that it will take them weeks to find the paperwork they need to convey title to you at all. Needless to say, you shouldn’t send money directly to any seller without a deed in sight; instead, send it to your title company for disbursal when the title company gets the deed
You’ll be strongly encouraged to skip the step of getting a title search, or told that you have to close in a timeframe that disallows a title search—and told that the title is fine, since the property underwent a foreclosure that wiped out all liens. Just. No. I recently purchase a 16-property package that included 2 houses with title problems that were NOT cured by the foreclosure, because they were missed by the foreclosing attorney and the parties involved were not notified. How did I find this out? Through a title search, of course.
You’ll be given the impression that there are hundreds of other buyers vying for the same properties you want. This is the bulk buyer equivalent of “we’re in multiple offers”—and I’m sure that sometimes they are. However, it’s also been my experience that these other offers seem to evaporate, just as they do with agents. When working with bulk buyers, as when working with any seller, DON’T BE A MOTIVATED BUYER. Don’t raise your offer, or put aside your due diligence, or do anything else risky because you’re threatened with competition or with losing your relationship with the seller or anything else.
You won’t be able to wholesale these deals before you need to close. These sellers don’t care if you’re going to make money wholesaling their deals—they don’t care if you assign the contract, or get a 5-figure profit for doing so.

However, they also don’t give you enough time, particularly if you’re going to be buying several properties yourself, to find buyers for them. 10 days to close is a long time for these bulk guys; if you’re dealing with them, you’d better have the money lined up to buy even if you plan to ultimately wholesale the deals.

This is important, because—at least as industry conventional wisdom has it—you get ONE chance with any particular seller. If you say you can close, then don’t, you’re done. If you say you can close on Wednesday, then try to delay for a week, you’re done.

You’ll get the best prices if you buy more than 1 property at a time. These sellers seem to deal with “onesy” buyers differently than they do people who make offers on multiple properties simultaneously. Depending on how many properties a particular bulk buyer has in your area, you can often get very deep discounts (as in, 60%+ off of asking price) simply by offering to buy all the properties they have, or packages of 5 or more if they have tons of inventory in your area. And if you can pick up a stray or 2 for them—that is, accept the one property they have in that rural county 50 miles from you—this can help you get a bigger discount, too.

Expect MASSIVE disorganization from the sellers. MASSIVE. It appears from my admittedly-limited dealings with bulk buyers that they are much more focused on and systemized about BUYING real estate than they are about selling it. The level of administrative problems—some of them pretty darn significant—has been, well, shocking. For instance:

I bought a property from a seller who was the servicer, rather than the owner, of the property. As usual, they insisted upon having the purchase price wired to them immediately upon acceptance; as usual, I refused and escrowed it with my title company, instead. Our scheduled closing date was March 17th. Instead, we closed on April 5th. Why? Because the seller couldn’t locate the power of attorney that allowed one of their employees to convey the deed. For over 2 weeks.
In my 16 property package, there was at least one wherein the seller had also signed a purchase contract with another buyer. He called me a week after I closed and told me that he had sent them the full purchase price, spent money on a title search, called the seller to schedule a closing, and THEN been told that, oops, the property was already sold and closed. But that’s not even the one that took the cake:
I recently discovered that another company ACTUALLY SOLD a property I own to another buyer. Took the money, signed the deed—the whole nine yards. Fortunately for me, my deed was already recorded. Unfortunately for the buyer, he didn’t know any of this until after he’d moved in and begun repairs on the property. How did this happen? Word didn’t get to the salespeople at the company that this property was off the list—and thanks to the high-pressure sales, quick closing requirements, and so on, they were able to get all the way through the sales process prior to discovering their error.

So yes, there are pros and cons to buying from these bulk buyers. Right now, the opportunities outweigh the hassles, but be aware that this won’t last forever.

More and more bulk buyers are entering the business—including, get this, subsidiaries of the same large banks that are SELLING their REOs at pennies on the dollar—because they’re attracted to the potential of high returns. This means that prices on bulk packages will start to be driven up both by companies that don’t quite know what they’re doing, and by new players who are willing to accept lower returns.

In my observation, this is already being reflected in the pricing to you and I—and eventually, these deals will get priced right out of the range of the professional wholesaler/renovator/landlord, and only go to the newbie/inexperienced investor buyers out there.

So grab your chance while it’s out there; just be as careful with these deals as you would with any other.

Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at www.TheRealEstateGoddess.com

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