Banks Have the REO Market Locked Up

By Daren Blomquist

Jay Schurman concluded that “banks are not in the real estate business” after a marathon REO purchase in 2008 that started in January and ended in August.

“While it was frustrating to have to wait for the bank to list the property — we would have offered the same amount in February that we ended up buying the property for in August — it was worth the wait,” he said soon after the purchase.

Nearly two years later lenders are much savvier about selling bank-owned properties, and their newfound know-how is grounded in the basics of supply and demand, which are both heavily impacted by foreclosures in the 2010 marketplace. Sales of properties in some stage of foreclosure accounted for one-third of all sales in the first three months of the year, according to RealtyTrac.

Driving Demand

Lenders have become more willing to set REO asking prices well below peak market values, helping to ramp up demand from first-time homebuyers and investors.

“We’re seeing significant discounts – sometimes as much as 50 to 60 percent off the properties’ previous high value,” wrote Robert Friedman, chairman of auction company REDC, in an e-mail.

The lower pricing strategy and resulting ramp-up in demand is ultimately better for lenders’ bottom lines, helping them move properties quickly and mitigate their losses, according to Tom Driver, director of operations for Keystone Asset Management, a Lansdale, Pa., company that provides REO asset management services to lenders.

“The practice of testing the market and adjusting after 30 or 60 days is no longer employed as banks realize that overpricing their assets only leads to longer days on market and greater losses,” he wrote in an e-mail.

Short Supply

Aggressive pricing and an “artificial shortage” of bank-owned properties in Las Vegas have created a buying frenzy there not unlike what occurred in the boom market, albeit with prices as much as 70 percent below the peak, according to REO listing agent Bryan Pellican.

“We’re getting multiple offers on almost all our listings … Buyers have been offering above-list for the last two months, and cash offers,” Pellican said.

But Pellican sees the current market as a “false bottom” that lenders and government-sponsored foreclosure prevention programs are helping to create by delaying the influx of new REO properties on the market.

“I think what they’re doing is that they’re trying to regulate the flow,” he said. “Which I think is going to prolong how long it’s going to take to recover, but it might feel like less of an impact.”

And lenders are increasingly leasing REOs instead of listing them, according to Michelle Mangione, who with her husband owns a property management company called Blue Real Estate Services in coastal Orange County, Calif. The company runs a Hold For Rent (HFR) program that evaluates, repairs, leases and manages REO properties for mortgage servicing companies and private investors.

7 Tips for Buying REO Properties

With the number of bank-owned REO properties expected to rise significantly in the coming months, we’re offering you 7 Tips that can help you more easily and more quickly snag a bank-owned property.

1. Hire an REO expert with experience buying bank-owned properties in your local market. RealtyTrac has thousands of agents to choose from in our RealtyTrac Agent Network.
2. Avoid lowball offers. Since most bank-owned properties are being sold at list price or above, a lowball offer will not work at current market conditions. Write an offer slightly above list price.
3. Determine the value of the property. You make your money when you buy, not when you sell. ReatyTrac’s Trend Center can help you become an expert in your market so you can recognize a bargain instantly when you see it. Also have an inspector and contractor evaluate the property and itemize all the repairs that need to be made. Subtract the cost of these repairs from the estimated value.
4. Submit a complete package. Each lender has certain guidelines for submitting offers. Send a proof of funds letter, a bank account balance statement and a pre-qualification letter from your lender if you are using conventional financing.
5. Write multiple offers. Don’t expect your first REO offer to be accepted. Competition is fierce. Be prepared to write multiple offers on different properties before you land one.
6. Prepare for counteroffers. Banks will often send you a counteroffer at a higher price. You may be willing to raise your price slightly with the first counteroffer, but if a second counteroffer comes in, respond with your “best and final” offer, reminding the selling agent that you are only buying one REO property.
7. Be prepared to walk away. If the bank doesn’t accept your offer or you’re unwilling to raise the price during the counteroffer period, be prepared to walk away and find another deal.

MY COMMENTS:

I have been saying this for Months. The banks don’t want to flood the market with foreclosures & have another scare like in 2007 & 2008. The banks are leaking the properties out one at a time at way below market value & when they hit the market so low there is a feeding frenzy which results in both multiple offers (sometimes up to 8 to 10 offers) & properties pending fast so they no longer show up as active listings. The multiple counter offers of “Highest & Best” drives the price back up to Market Value or even above. What looks like a killer deal at $68,000 ends up selling for 10, 20 or even 30 thousand more than asking price.

Since there aren’t that many active foreclosure listings showing at any given time it  gives a false security to the buyers that we’re running low on the foreclosure market because when your Realtor looks up active foreclosures there aren’t that  many. They go pending so quickly but trust me there’s still plenty of foreclosures out there, they are just marketing them differently.