My first capital commitment to an REO fund assumed courthouse steps supply would translate into acquisitions, and it did not

Eighteen months in, we had deployed maybe 35 percent of committed capital. The thesis was solid on paper: filings up, servicers overwhelmed, pricing would soften. What nobody modeled was how long the servicer pipeline actually sits before anything reaches disposition. Our operator was in the Southeast, two markets in Georgia and one in Tennessee, and the banks were holding paper for 14, sometimes 18 months before listing anything. By the time an asset hit the REO stage, every retail flipper in the county had already driven by it six times. The spread we underwrote at acquisition assumed we were buying distress. We were mostly buying a slightly discounted retail market with worse inspection rights. I kept asking the operator for the sourcing breakdown, and the numbers showed more than 70 percent of closed deals came from three MLS-listed assets. That is not a distressed pipeline, that is just shopping with extra steps. The fund is not a disaster, I am going to get out somewhere around a 9 percent net, but I went in expecting something closer to 14. The assumption that did the damage was treating filing volume as a leading indicator of acquirable inventory. It is not. It is a leading indicator of eventual supply, and everything in between is someone else's negotiation with a servicer you have no access to.

2 replies

okonkwo_pm ServicePRO 18

That servicer pipeline lag is the part nobody prices honestly. In the Columbus, Ohio market I was watching closely in 2022-2023, the gap from filing to REO disposition was running closer to 22 months on anything with a contested foreclosure, not 14-18, so your operator's numbers were actually on the optimistic end. The 9 percent you're landing on is roughly what I'd call fair compensation for illiquidity with retail-grade deal flow, which is exactly what MLS-heavy sourcing produces.

okonkwo_pm ServicePRO 18

ryanmck27 Get yours

The filing-to-disposition gap killed a deal structure I was watching pretty closely in 2022, never committed but came close. What I kept trying to get a straight answer on was cure rate at the NOD stage, because in the Southeast specifically a meaningful chunk of those filings never convert at all, borrower works something out, servicer does a mod, whatever. So you have people modeling 60 or 70 percent of filed volume as eventual acquirable inventory and the actual conversion to REO disposition in some of those Georgia counties was running closer to 30. That math destroys an acquisition thesis before the holding period even starts.

ryanmck27 Get yours

My first capital commitment to an REO fund assumed courthouse steps supply would translate into acquisitions, and it did not

2 replies