Have you heard the buzz about buying Bulk REO’s? In case you haven’t, it’s where an investor purchases 10-15 homes in a bulk package for around $100,000 ($6,000-$10,000 per house!). The investor then sells these houses for $25,000 to $35,000 to homeowners with a seller financing document called a land contract. Seller financing is critical to this business because 1) banks won’t originate a loan for a home valued less than $60k, and 2) banks won’t lend to credit challenged homebuyers. In the bulk REO business, the seller becomes the bank and the homeowner repays the loan over time at a lucrative interest rate—9% to 10%.
There are two ways to participate in this business, and both offer high ROIs.
Are you an active investor? If you are an experienced investor and want to create a new business buying and selling these REOs, you will capture greatest upside in this opportunity. Cash flow is long-term and lucrative. This business is a long-term investment because as mentioned above, the land contracts pay out over 10-25 years at 9% interest. Because of the entry cost is so low, many active investors realize a ROI in 18-24 months. However, the only way to realize quick cash is by selling the land contracts at a discount to passive investors. Selling a 10 to 25 year note early leaves a lot of profit on the table, but cash on hand provides you with an opportunity to purchase more properties and continue the cycle. Some active investors build their business with IRA money—but only after receiving competent direction from an attorney and account experienced with this type of investment.
Are you a passive investor? If you don’t want to create a new business, you can buy the cash flow from active investors! For example, a $35,000 land contract would pay about $350 per month at 9% fully amortized over 15 years. This means about $63,000 is paid out over 15 years to you, the buyer. And you could buy this note for $19,500 to $25,500. As a passive investor, you can purchase notes with your IRA money. All of the payments return directly to your IRA tax free. The typical yield on these land contracts is around 20%. If you are interested in purchasing notes, a good way to find sellers is to network at SJREI and to contact a bulk REO reseller such as Summit Solutions Team, Corp. We often know which of our client investors are interested in selling their land contracts.
The key to do either passive or active investing is to move your 401K’s and IRA money to a custodian like Entrust that allows you to direct your investments. Traditional Self Directed IRA’s are a step in the right direction, but the problem with using this option to buy real estate is that you will soon learn you need the custodian to sign all of your purchase contracts and sales documents. This step could actually cost you a purchase and a sale in this fast-paced business.
Creating an IRA LLC with an experienced real estate attorney is one way to overcome these obstacles. In addition to getting checkbook control, a properly planned LLC can provide a way that you and your family can combine your IRA money to make investments. There are many federal regulations that must be followed, so use an attorney to help you create your IRA LLC and consult with tax professional to ensure compliance with IRS requirements.