There are only so many ways to legitimately fund deals, and, as you know, it can be very difficult to get a loan these days from a conventional Lender.

 Many of you are probably experiencing some problems, even with Lenders used successfully in the past. 

 There’s a new tactic you can take that can actually get the bank to fund the deal for you!

 The banks are required to hold in reserve 50 percent of the amount that they are holding in bad debt.  So, if a bank is holding $100,000 million in toxic assets, then they must hold in reserve $50 million.  They cannot borrow against that, nor can they lend that out.  As bad debt piles up, the less and less flexibility the Lender has.

 Once a property goes through auction and sells back to the Lender, the asset is owned free and clear by the Lender.  They carry the losses on the books, but the REO property is never collateralized against those losses.

 This peculiarity in banking law and bank book keeping is causing money to dry up for Lenders to use in making consumer and commercial loans.  Banks that can’t borrow from the Fed and lend to customers are banks without much future.  As the problem gets worse, banks begin to fail.  We’ve already witnessed the demise of around 60 banks, and many more may follow if something is not done to ease this banking constraint. 

 Banks, particularly the small regional and local banks, credit unions, and commercial mortgage companies, are more than eager to sell you their REOs, if you approach them correctly.  Furthermore, they will often be willing to fund the deal, since they do not need to go out to the Federal Reserve Bank and borrow money in order to sell you the property.  It is already owned free and clear.

 This works best with the smaller and more regional lending institutions because they are hurting more and were bailed out less.  Some banks are willing to lend the money to buy their own REOs with little or nothing down, ability to assign contracts, assumption clauses, no document loans, approvals for wrap-around loans, and many other concessions just to get these toxic assets off the books and back into place as performing assets.

Investors should approach local lenders to get their REO listings, including the ones that have not been published yet. Research the list for those properties that will cash flow, and put offers on all the ones that look like they will work—provided the Lender is interested in working on the loan.