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The REO Formula Revisited

I do not know where the REO connotation originated, but I presume that it in the late 70’s and early 80’s it was synonymous with the line item category used by banks and savings and loans to designate properties that had been foreclosed upon or that were of no further use to the bank, (like bank branches and the like). The REO label became synonymous with assets that were difficult to sell for not only banks and other lenders, but all types of institutions. Also, during this time period, creative real estate practitioners began formalizing concepts and ideas to assist lenders and others in disposing of their increasing REO assets.

The REO formula was derived from these efforts. The basics of its foundation are quite simple. Look for a problem property and an owner that has money to buy his way out. In the case of the S&L’s and Banks they had problem property and had money. During that time one approach for a real estate broker was to list the problem property with the provision that the lender would add cash to the property in exchange for the broker locating a borrower willing to accept as part of the loan consideration on his property the REO and some cash.

The formula worked this way. A $1,000,0000 problem property is listed by a broker. The broker finds a borrower in need of a loan. His equity, value and other parameters would qualify for a $4,000,000 loan. The borrower agrees to a loan which is funded by $1,000,000 of the lenders property and $3,000,000 of cash. The borrower gets a new loan and a free and clear $1,000,000 property. The lender gets rid of the albatross $1,000,000 property and gets a new loan for $4,000,000 on the books. Everyone is happy. Right? Well not quite.

While all this was happening the Feds got involved and passed a series of laws in the 80’s that bolstered prior 70’s laws, stifling the REO concept and its use by preventing lenders from engaging in REO type loan deals (and others). They generically termed the action “Tying”, which in short means that “if you do this for me, I will do that for you”. “You take my building I will make you a loan”. Penalties are stiff. Triple damages, civil penalties and a host of problems for the lenders. Real big time problems. The real blood and guts of this law can be found in the article :WHAT CONSTITUTES VIOLATION OF PROVISIONS OF BANK HOLDING COMPANY ACT PROHIBITING TYING ARRANGEMENTS (12 USCS~1972(1), written by James L Rigelhaupt, Jr. J.D. I wont go into this body of work here, but be apprised that anytime a lender entices or makes a loan which is out of the ordinary, these rules may apply. I encourage you to follow up. Several years ago I happened to be involved in a “Tying” situation and received major concessions from a lender to make the problem go away. Knowing the rules was important.

The one thing that the “Tying ” rules failed to do was eliminate individuals, businesses or other non federally regulated enterprises from using the REO concept. I still use this formula probably more often than any other. I look for situations where wealthy owners or well to do businesses have a real estate problem that has been difficult to solve. As a principal, I offer to trade select portions of my real estate to them for cash and their property provided I can work my way through their REO. As a broker I would do just the same, except I would list their property. This concept can be used not only to buy another property but can be used to create paper on another property as shown in the prior example with the lenders. The applications are several.

This one formula will help you obtain loans when no one else is. Move property when no one else is and remain productive in down times. The opportunities available with our existing slight recession is incredible. Things have slowed, values have dipped, people are anxious to move property.

Here is the formula:

REO (Problem Property) + CASH= NEW PROPERTY
REO (Problem Property) + CASH= MORTGAGE
REO (Problem Property) + CASH= LAND LEASE

Look for the problem property, look for the wealthy owner.

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