One of the biggest opportunities facing investors is the ability to acquire distressed notes or REO before they are marketed.

While many services exist to help you track the delinquent and defaulted loans in your area, that’s just the first step. Getting ahead of those assets before they hit the market is the tricky part.

In many instances, banks need to put assets out on the market to realize the highest price. But investors can also leverage their relationships with lenders, servicers, and even other owners to realize the opportunity.

Tungsten Realty Advisors, a Chicago-based investment and operating firm, has purchased two distressed notes on fractured condo projects in the past year. The company was able to get a 40 percent and 63 percent discount on the notes, mainly on the strength of its banking relationships.

“Some of our lenders are our biggest resources in terms of picking up new deals,” says Michael Flight, co-founder of the firm. “But you need to get a few deals under your belt to develop those relationships, to show lenders what you can do.” The company often uses its line of credit, or a low-leverage FHA loan, to close the deal.

While having a relationship with lenders and servicers is critical, it’s also important to keep in close contact with other local owners. “That way, you can determine which owners are really in trouble,” says T. Sean Lance, president of the Troubled Asset Optimization group of NAI Tampa Bay.

Another good tip is to ask the guys in the trenches. Subcontractors often know which local assets are distressed more than anybody, since they might still be waiting to get paid.

But these relationships don’t necessarily need to be pre-existing. Two years ago, Carlos Vaz arrived in Dallas with few local contacts and less than $100,000 to start his multifamily investment business. But when Vaz purchased the 266-unit Lenox Court Apartments in Houston in September, it was the 10th distressed acquisition deal he closed in the last two years.

Vaz’s company, the Conti Organization, purchased nearly 2,000 units in the Dallas and Houston markets in that timeframe—either REO assets or distressed note acquisitions—and now holds assets of about $40 million in value. Nine of the 10 deals were bought off-market from lenders for a fraction of their value.

Vaz says there’s no particular secret to working the lender network: Just go out and meet as many lenders, brokers, and servicers as you can. “Many people want to do it the new way—send emails to as many people as you can and sit back and expect them to come to you,” Vaz says. “But the old way—meeting in person, shaking hands, trying to negotiate as many REO meetings as I can—is the best way. It’s just hard work, homework, and relationships.”

Once you find the opportunity, it can be difficult to find debt to finance the deal, especially if it’s a Class C property that needs rehab. “What we’re telling the special servicers is, you’re going to have to finance it or you’re not going to sell it,” says Debbie Corson, who runs Apartment Realty Advisor’s Distressed Asset Solutions Group, which helps lenders dispose of REO. “You can’t go to Fannie or Freddie for this stuff, and HUD isn’t foolproof, and the local banks don’t want to do it.”

For distressed assets in need of a quick close, all-cash deals are common. But Fannie and Freddie will still make a loan for performing assets bought from distressed sellers. For smaller deals, regional banks are a good source, even though most are requiring recourse now. Life insurance companies have also re-engaged the market and may be a good source for larger deals.