REOs are attractive today but may be “fools” gold.

REO investing can be lucrative but requires specialized knowledge and skills as well as a solid capital base.

In the charred ashes of today’s economy there emerges incredible opportunities for investments, both long and short-term. Everyday I see great opportunities to lend money on real estate for great returns, acquire commercial properties for long-term cash flow, or acquire residential properties for either cash flow or quick profits. One of the seemingly most accessible opportunities is REO houses. These are properties that were taken back by banks through the foreclosure process, and they want to sell them quickly, sometimes for far below market value. As a hard money lender I get calls almost daily from people looking for financing on REO deals. 95% of the time I graciously end the call within a few minutes.

Why? REOs are not as easy as everybody thinks, and few of the optimists chasing them today really have the skills, knowledge, networks, or finances to turn it into a successful venture. There are three distinct phases of successful REO investing, each with its own complex and often specialized range of activities.

The whole process can take a lot of time and upfront money to do it right. This brings me back to all those phone calls. Most people who call, aside from not having adequate experience, seem to think a lender will give them most or all of the acquisition and the rehab money. This is simply not the case. A good rule of thumb is that a hard money lender may provide up to 65% of the ARV (After Repair Value) or 80% of acquisition price. Keep in mind that these are absolute maximums, and your deal may attract lower loan amounts. This means you need to be well capitalized and financially prepared. If you don’t have a solid balance sheet going into the process most lenders won’t provide you any funding at all.