Saturday, April 07, 2007

Got REO?

“Real estate always goes up in value” and “Real estate prices are sticky on the way down.” Either one, if repeated by enough people, becomes sort of an implied truth. You just can't assume that it will still be true tomorrow.

Notice how belief in the first statement has gotten an awful lot of people true financial misery. Belief in the second statement gives those home owners hope. Maybe there is a way out, if they just wait a while. If you’ve ever owned a stock that went up like a rocket, you probably rode it all the way down to the ground thinking that it has to go back up. A little greed can go a long way. Real estate could indeed become sticky, kind of like "Fly Paper."

In San Marcos, one fourth of all house sales are probably from trustee sales (an educated guess on my part). No new real owner, but the selling price is real. The lender gets the house for the amount owed (assuming no other bids). The sales price is recorded. If that doesn’t screw up the average resale price, then you must be a Realtor.

Notice all the bankruptcies? What do you think happens here? You walk up to the lender with your lawyer and explain to them that they can have the house now, if they don’t file a NOD and mess up your credit (what’s left of it). Otherwise, you’ll sublet the place to your son’s motorcycle gang for nine months (the time it takes for it to go to trustee sale). Of course you’ll then demand the $2,000 move out fee to help you get a new place(because you’re broke). You’ll probably get it. The lender receives a clean title and can hand it over to a broker to list immediately. This speeds up the process by 3-9 months.

The Bankruptcy and the Trustee Sale transaction each add one to inventory as well as one to sales totals for the month. The bank in most cases is just a middle man, managing the lender's house loan for a fee. They’re really not in any hurry to unload the REO’s. The more the merrier! I would guess that the management fee for an REO is more than that of a performing loan.

Property taxes are due this month. Its nice to know that at least the lenders are paying their taxes on the REO's. The meter is still ticking. A 1% tax on a loan portfolio is painful.

Real estate is only part of a bigger problem. 50 lenders have bit the dust in 100 days. It doesn’t seem to have set off any bells or whistles, kind of makes you wonder if anybody really understands what is happening. The answer is “Not yet.” It’s kind of like hearing the whistling noise an arrow makes as it is released at a target.


carlgrace said...


When a lender takes back a property via a trustee sale, does that count as a sale as far as real estate date goes? So when the NAR says sales are up, could some of them be REOs?

Jim in San Marcos said...

That is the case. It's not that it's intensional, a sale is a sale.

The irritating thing is that the recorded price for the Trustee Sale is the amount owed. So if the amount owed is say $100k over current value, it skews the average sales price for the month upward.

Today San Diego reported average sales prices up and total sold down on 3,218 sales. About 1/4th of those could be REO's

So not only does it influence Average Sale Price, but also reflects in the total Number Sold.

So the Trustee sale can add one to sales, increase the mean price and add one to present inventory all at the same time.