5 REO Acquisition Avenues for Nonprofits and Govvies

Written by: Frances Flynn Thorsen Wed, December 29, 2010

Beyond Today's News, Crisis Programs, Housing Crisis, Housing Markets, Market Activity

Nonprofits are flush with federal stimulus funds to purchase foreclosed properties. Faced with fierce competition for REO properties in hot markets, Neighborhood Stabilization Project (NSP) managers are adopting multiple property acquisition strategies.

NSP monies come with spending timelines to commit those dollars and a proviso that purchase price is at least one percent below appraised value. Open market competition for REO properties with real estate investors and owner occupants is time consuming and tough, and NSP purchase agreements are encumbered with contingencies for site-specific environmental review.

There are five methods of REO acquisition for NSP grantees:

(1.) Open market purchases match nonprofits with real estate agents in a traditional approach to purchasing properties. Most REOs make it to the market and local multiple listing services. In brisk markets, investors often secure properties before they are listed. Major drawback to open market purchases is competition. NSP purchase agreement restrictions place nonprofits at a disadvantage with investors’ restirction-free agreements and owner occupant agreements reflecting higher prices.

(2.) Tax sales and failed developments offer local opportunities for REO acquisition.

(3.) Direct relationships with servicers and lenders. Some national servicers have a “First Look” program geared specifically to NSP grantees. While each program is different, the servicers have crafted standard contracts meeting common NSP regulatory concerns surrounding environmental contingencies, appraisals and discount requirements, and tenancy issues. Competition is limited to nonprofits and government agencies during a prescribed offering period. Drawbacks to this program are found in uneven, local administration of direct sale programs by third party contractors.

(4.) U.S. Dept of Housing and Urban Development (HUD). FHA REOs are commonly known as HUD Homes. Nonprofits have opportunities to buy HUD Homes in several programs. Discounts between 10 and 30 percent are available during an initial listing period when bidding is restricted to nonprofits and governments. Bulk purchases of 10 properties or more are possible when properties have been on the market 60 days or more. “Dollar Homes” are available after they have been on the market 180 days.

(5.) Work through an intermediary. Some organizations work to connect NSP agencies with REO properties. There are different forms they can take. Most are facilitators; they do not take title to the properties. There are various intermediaries.

Regional purchase entities combine human assets of multiple agencies for volume purchasing advantages.
National Community Stabilization Trust facilitates transfer of REO properties from financial institutions to local stabilization projects. NCST is sponsored by six nonprofits. It works with Bank of America, Chase, Fannie Mae, Freddie Mac, GMAC, HUD, Wells Fargo and other servicers. The Trust has two programs: Aged Inventory and a First Look Program. Centerpiece of the First Look Program is REOMatch, a website that gives each NSP grantee a dashboard to its local market. Agencies map their target areas and review new REOs immediately when they are titled to the servicer. Property markers are linked to Zillow for a quick survey of property data – number of bedrooms, baths, year built. NSP grantees can express interest in properties through REOMatch and pre-negotiate purchase agreements directly with lenders.
REO Clearinghouse is a for profit intermediary that works in a similar fashion. REOC aggregates a list of properties in target markets and provides the lists to local buyers. REOC puts the buyer in touch with the servicer. The intermediary can help facilitate negotiation of price. REOC services are paid by the sellers.