Courthouse Auction Specialists
Frequently Asked Questions
Q. What is the primary focus of TREO?
Our primary focus is to provide a property acquisition and management platform for professional equity and debt investors. We are specialists in acquiring deeply discounted residential properties at Los Angeles County trustee auctions on the “Courthouse steps”.
Q. What is a Trustee Real Estate Auction?
The Trustee Auction is a legally mandated sale process used by lenders to settle a defaulted loan. The auction is a cash only, open out-cry, competitive bidding process and may result in a sale of the property to a third party. If the property is not purchased by a third party, ownership reverts to the lender and it becomes an REO. Every month, over 500 properties are sold at auction to third parties in Los Angeles County alone.
Q. I’m concerned about reselling homes in a weak job market and sluggish economy. Why is today a good time to buy single family residential properties for profitable resale or rental?
Low mortgage interest rates in combination with lower home prices have increased affordability to record levels. The pool of potential buyers has grown to record levels.
• Prices have declined to 30%-50% from the peak of the market in 2007.
• Today, it is less expensive on average to own a home than rent.
• Home sales volume is up 30% from 2008.
• The inventory of unsold homes is surprisingly low.
• Median home values have stabilized and actually risen in many markets.
• Buying at discounts to current discounted market value creates a cushion for safety of principal.
Q. How many homes has TREO acquired?
TREO executives have acquired over $2 billion in properties during the last 15 years. In LA alone, TREO executives purchased, rehabbed, and resold over 100 homes and apartment buildings after the 1994 Northridge Earthquake at significant profits. TREO, after evaluating several different investment choices, made the strategic decision to enter the Trustee Auction business in 3Q, 2009. We recognized that acquiring properties at courthouse auctions was our best choice to build a portfolio and to achieve the annualized IRR yield plateau of 30% or more for our clients. We have acquired over $8 million in new properties since TREO’s inception, many of which are sold, listed for sale or under repair prior to sale. Our business plan is on track to acquire an average of $5 million in new acquisitions each month.
Q. How does a Trustee Real Estate Auction provide investment
opportunities?
The real estate auction is a winning proposition for everyone involved.
BENEFITS TO THE BUYER:
• Smart investments are made, as easy to evaluate homes are purchased at deep discounts, typically 20%-30% below current market value.
• Auctions eliminate long and uncertain negotiation periods.
• Auctions reduce time to purchase property to a day, eliminating market value trends.
• Buyers know they are competing fairly and on the same terms as all other buyers.
• Private Loans are available to offer leverage without traditional lender
documentation and can be funded within three weeks.
BENEFITS TO SELLERS:
• Accelerates the sale process to a one day close, all cash.
• Eliminates expensive costs to the lender for brokerage fees, escrow, taxes,
eviction, rehab, buyer concessions and potential declining value trends.
• Buyers come prepared to buy “As is”.
• Creates competition among buyers – auction price often exceeds the price of the opening bid.
• Bring finality to the lender involvement with the borrower.
Q. Do Investors receive “clean” title?
TREO warrants and guarantees that upon the successful purchase of the property at the Trustee Sale, title to the property is clear of any liens other than those disclose to buyer at the time of the purchase.
Q. Does TREO inspect the property prior to bidding at the auction?
The only way to make an informed decision when it comes to bidding and buying at auction is to not only visit, view and inspect the property prior to the auction, but also review any comparable properties and market data pertaining to that property. TREO conducts a pre –bid tour (exterior only), a tax and title analysis, a price point valuation by multiple in house property evaluators and a bid analysis formula based on a significant value arbitrage for each investment.
Q. What are the key criteria of TREO’s investment formula?
• TREO purchases auction properties on an all cash basis, at 70% – 80% of our
evaluation of current market value.
• TREO leverages each asset at 50%-60% LTV with a recorded 1st trust deed to
increase overall cash on cash yield.
• TREO’s portfolio properties have a typical range of rehab of $5K to $15K for
cosmetic rehab, and work is completed in a few days.
• TREO selects sub-market specialists to list properties.
• The average turnover period on resale of homes is 4.5 months, depending on occupancy factors.
• TREO portfolio has annualized IRR range objective of 20% – 30% + on leveraged investments.
• Two turns of capital each year can be expected on the entire portfolio.
Q. How can I be assured of the security of my money?
Investor’s must demonstrate immediate access to cashier’s checks or wire or they may deposit funds directly with Fidelity National Title Company, as a custodian. TREO never has control of client funds. Clients provide TREO with vesting instructions for auction Trustee (personal or business entity) and receives deed to property upon payment to TREO.
Q. Is your management team invested in your acquisitions?
Yes, the TREO team is fully committed to the company’s investment strategy. TREO executives invest personally in TREO programs and in Joint Venture formats with investors upon their request.
Q. What is your asset management process?
TREO has developed a comprehensive Asset Management process. Immediately following the acquisition of a property, our Asset Management team addresses a myriad of issues that include: ordering an independent appraisal, obtaining a title report, financing the asset, initiating the tenant termination process, producing a market absorption study, creation and implementation of a rehab or value added plan, the formation of a sales strategy, etc.
Q. What is the process used to estimate the repair and maintenance costs?
Prior to acquisition, a designated member of our valuation team drives to each targeted property prior to any authorized bidding at the auction. Usually, the realtor can only do an outside inspection of a property, if occupied. They then immediately submit digital photos, plus a detailed description of probable rehab or value add elements regarding the condition of the roof, entry, facia, landscaping, driveway, garage, etc. Team members also drive to nearby sales and listing comparables and generate a value estimate of the property, which is submitted to our appraisal department for final review. Upon vacancy, our project manager tours the property and creates a budget for approval by our investment committee. Work commences immediately. TREO projects an average of $10,000 in repairs across a portfolio of similar homes.
Q. How do you complete tax and title due diligence?
Title and tax review are completed BEFORE the bidding process by experienced professionals on staff, including a former President of a local Title Company.
Q. How does TREO arrange financing for an investor? What sources are used and what is the time frame?
Loans are pre-arranged for TREO auction acquisitions with private investors who earn 9% - 10% fixed interest, on a maximum 58% loan to value, based on the appraised market value. Deeds are recorded as 1st Trust Deeds. Payments are made monthly and the loan term is typically one year. Many TREO investor clients provide these loans as an alternative to investing in the ownership of a property.
Q. From the time the property is purchased at auction to eventual re-sale what are other costs?
The expenses include purchase, loan and sale closing costs, TREO acquisition fees, loan fees and carry costs, rehab, taxes, insurance, general maintenance and asset management. Most properties are sold within 4-6 months of acquisition.
Q. With a possible new wave of foreclosures coming, how will this effect your pricing?
We believe that the auction opportunities will accelerate during the next 12 months as banks release more homes through the trustee auction process. Pricing margins (buy versus re-sale values) should remain stable.
Q. Can the houses be leased at a “breakeven” if they need to be held?
Yes, there is typically positive cash flow; yields will vary depending on cash and leveraged programs. As an example, the below scenario would be typical for an acquisition on an all cash basis:
A 2,000 square foot, $400,000 market value home was purchased at a total cost, including brokerage fees, closing costs, rehab and leasing fees of $325,000. The house is rented for $2,000 per month or $24,000 per year. After taxes, insurance and general maintenance of $6,000 per year, the estimated net cash-on-cash yield would be $18,000 per year on a $325,000 all cash investment, equating to a 5.5% yield (plus depreciation and appreciation opportunities). The yield would be lower if a loan is in place
with a higher cost than 5.5%.
Thank you,
The TREO Team
“This is a time of unparalleled opportunity”
For further questions please contact Seth Phillips at 213-784-4447
