Tuesday, April 10, 2007

REO a Hot Potato

Here is a little bit of info on REO’s. This is what I picked up while trying to get a few to list at the Real Estate firm I use to work for.

When a house is foreclosed on (in California) the note holder is probably 1,000 miles away in a different city. This cash money lender picks a bank that is close to the failed property (he needs feet in the street). After the trustee sale (assuming there are no bidders) the loan holder’s debt plus expenses, is the bid that wins the trustee sale. The appointed bank becomes the manager of the REO. The bank, as a financial fiduciary, has the responsibility of managing the property and getting it sold. The first thing the note holder will want from the bank is an evaluation of the property. What’s it worth, does it need repair? They will need a property appraisal. The banks duty is to insure that the house is sold for a fair price, thus protecting the foreclosed home owner’s rights. Most likely the homeowner is going to get a 1099 after the mess unwinds.

After the note holder gets the appraisal, they would determine a suitable sales price and advise the bank. The bank if it doesn’t have a real estate section, goes out and selects a real estate broker to list the place.

Now if we travel to the note holder’s work place, the guy doing the paperwork is probably working on REO’s in all 50 states at the same time. In the past, his performance was gauged on getting full value on the loan amounts. This wasn’t hard in a rising market. Ask yourself, is he going to slash prices to the bone, to move them? Probably not, it could get him fired. The appraisal he got is probably stale by now and the conditions for each part of the country are different. The sales price he is comfortable with might be a tad high relative to the local conditions.

The note holder's inventory will start to increase. No need to panic, they have been able to handle it in the past. If it doesn’t sell after 6 months, change realtors and lower the price. There is some time involved in selling an REO. I know from experience with the VA Repo’s that there was about a 9 month black out period from Trustee sale to the VA listing date, and this was when repo’s were a hot item. Not quite sure why, but it must involve paperwork of some sort.

It looks like a lot of these REO’s are going to mature for about 3-12 months before they get placed on the market. In a very poor market, these foreclosures could become more over priced, due to the stale appraisal and would fail to sell. If you add to that, the vandalism, theft and neglected maintenance, things could go down hill quite fast.

Since REO’s are local, and the guy calling the shots is 1,000 miles away, you are not going to move inventory in a timely fashion. The thing not fully appreciated, is that if it takes you 9 to 12 months to move inventory in good times, this could get out of hand real fast.


Anonymous said...

"Options speculators are apparently expecting bad things from Washington Mutual (WM). It will report earnings on 4/17. Today more than 10,000 April 35 puts have traded vs open interest of just over 7,400. More than 14 thousand April 37-1/2 puts have traded vs open interest of 19.7k. KBW recently stated, “WM which has a large share of production in Alt A products and, in our view, has a large share of its balance sheet exposed to mortgage.”

Jim in San Marcos said...

Hi Anon

I would hazard a guess that the credit card side of that bank is probably in more trouble than the real estate side.

Either way, it could prove very interesting April 17.

Thanks for the imput.