Investment in bank owned (REO’s) Southern California properties

Bank Owned Bulk properties – Investment opportunity
Current financial situation in USA caused the increase of real estate properties owned by banks. The decrease in sales of real estate in the years 2006 to 2009 encouraged the banks to find alternative ways to reduce their inventory of properties. One way that becomes available recently is the purchase of bulk properties by investors for a substantially reduced price. This option is available for bulks of bank owned properties valued at about $5 Million per bulk. The purchase of that bulk is for 35 to 50 percent off the current estimated market value of the properties. Investors purchasing these bulks are able to pick and choose the properties they are interested in as long as that the total current value of the properties is about $5 Million.

Risks and profit potential when investing in Bank owned properties

1.         Even thou most financial specialist start to predict the end of the real estate drop in 2010, some say that prices of homes in the USA didn’t hit bottom yet. In that scenario investors may lose some value of their investment and with that may lose patience. This type of investment must be long term investment and value drop will go back up. Since this investment is buying properties in cash therefore, every investor has to recognize the fact that this program is for 5 to 10 years and the income is mainly determined on the increase in property value within 5 to 10 years and not on rent income only.

2.         The investor will have monthly costs that ultimately will be covered by rent of the properties. Another risk will be the luck of renters for these properties or a drop in rent prices. Usually the rentals market is better in times like these however the investor need about 65% occupancy in order to have positive cash flow.

3.         Some investors will try to maximize the potential by financing the properties after purchase. Leveraging on these properties will naturally bring another risk with it. Taking loans against the properties in order to increase the potential on the initial investment become risky again if property value drops the loan to value will increase and the banks may recall their loans if they fill unsafe or ask for more security. Usually, banks are open for negotiations for better terms in that scenario and the risk is law. 

With consideration to these risks the general belief is that investment in the real estate market in the USA is still a very solid investment. The US real estate market is acting as a wave, with picks and falls, since statistics had been kept on it. Every pick is higher in home prices from the last pick before it. Analyzing that history is the basis for the assumption that the fall nowadays will be followed by a pick higher in home prices than the last pick in 2006. Since about the year 2000 house prices in the western US were on the rise and the top homes priced at 200% more than the low point of the wave at 1999 to 2000 for the same home.
Following the real estate market’s last few waves (about 35 years) draws the same conclusion – homes usually increase in value more than the last pick in the market. In the year 1970 an average house in a good location in the San Fernando Valley (a suburb of Los Angeles) was priced at $25,000, the same house in 1980 was priced at about $100,000. Assuming that the value will increase 300% during these years was considered “insanity”. In the next 10 years by 1990 the same house was valued at $225,000 and in the year 2000 it was already $450,000. At the pick of the market in 2006 an average house in the same area was priced at $1.2 to $1.5 Million. With that in mind it is fairly safe to assume that the next pick will be higher than the last one in the year 2006.

Investment in Bank ownwed properties in Southern California

The best investment opportunity at this point (2010) is to purchase bulk bank REO properties in areas of southern California that had low priced homes and dropped in price about 40% from their value in 2006. These areas are fully developed and usually new. These areas were built in order to accommodate the increase of LA’s young first time home buyers. This enormous construction development was hit by the bad economy in 2006-2007 and the developers had no choice but to lose the homes to the lenders. Unlike the San Fernando Valley area or LA city that had years of increased prices before the fall of 2006, these area’s are still new and law priced, that didn’t hit their pick yet, and have great potential to increases in price to imitate the increases in the SF Valley of the 80’s and 90’s. These areas are the new LA suburbia.
The banks currently offer these homes for up to 50% off of their current price, therefore the purchase price of a house that was $270,000 and dropped to $162,000 will be in bulk about $80,000 to $100,000. Assuming that the price will go back to its pick price three years ago, based on the market history, is a logical assumption. Analysts predict that homes will go back to their original price within 5 to 7 years. Based on these numbers the potential is for about 250% equity without using banks financing options. Since the target areas are new and the prices are low to attract young consumers, the future value is unpredictable and may grow to be a lot over the last pick.

Points to consider when investing in Bank Owned Properties

1.         The window of opportunity is available now and may change soon if the real estate market value will start to rise. In October 2009, activity in real estate sells was the best in years and market sells rose over 7% from previous month.

2.        Allot of investors are waiting for movements in the real estate market. If the market will react to this activity and it will not be a one time increase in sells, investors will start buying more properties and the market price and availability of Bank Owned properties will end the Bulk sales by the banks


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