REO Assumptions and Assertions Biggest Assumption: They just need to dump it
Translation: They’ll take any kind of crazy offer
Assertion: N-O-T YET
As a former Fannie Mae Broker–Specialist, I can provide insight into the real world of buying and selling
bank-owned properties. First, forget most of what you think you know about such transactions—you’re probably way off target.
The Devil’s in the Details . . .If you’re assuming they just need to dump it, you are half way right. They do, they really do, but not at any price. The most common misconception is that the holder of
REO property will accept any offer without consideration for the value of the collateral. I suspect you’ve been watching too much late night television. While it is true that the increased volume of foreclosed properties means a substantial increase in REO inventory, the basic business principles which govern liquidation are not changing as rapidly as they need to (or as you had hoped they would.)
Harsh New RealityIt is a harsh new reality that today’s market is being flooded with REO’s. Thousands more will be added in the months ahead as a result of the backlog which has been created because of political posturing. As a consequence, both federal agencies (HUD, VA, Fannie and Freddie) and private mortgage insurance carriers will need to adjust their guidelines during the upcoming months. Unfortunately, as a practical matter, in the meantime, they and
loan servicers must operate within the guidelines of existing regulations and existing contractual stipulations until they are amended. They will be relaxed—necessity will dictate that they must be. The consequence will be a ‘let’s make a deal free-for-all.’ Good for
agents and buyers—not so good for price stabilization. But it has to happen and the sooner we get to it the better.
They Don’t Know Its ValueYou’re right on target with that assertion. The “local market reality” is a piece of data which is hard for the servicer to grasp when they handle properties around the country from a centralized location. The truth is, their usual resources are less than reliable. They must rely on:
- Their appraisal, and we know how likely that is to be inflated
- A $50-$75 BPO—okay, does anyone really think you’re getting an accurate evaluation with a product produced in a BPO mill? Do you really think that they are trying to determine value with that document? (They are NOT. They are fulfilling a servicing requirement to have a BPO performed.)
- Their gut instinct
- The loan amount shown in their computer—but since when has that been connected to the ACTUAL value of the property?
Hence, the market will dictate and that process takes time. If the property is ‘rejected by the market’ for an extended period of time then it is declining in both actual and perceived value. It’s in everyone’s best interest to determine fairly accurately, from the onset, what is today’s
market value. Consequently, the servicer needs a current, as-is
appraisal. While many appraisers were rewarded for inflating values during the boom years, they are now stuck with the unpleasant task of trying to justify vast differences between former and current value. Market correction is not enough of an explanation but the recently sold comps don’t lie. It’s worth what someone will pay for it—today—not last year.
The Law of Supply and DemandIn time (I think within the next three to four months) the inventory will be so high that the
valuations will plummet and get in line with what a ready and able buyer is willing to pay a reluctant REO owner. During the boom years hundreds of thousands of houses were built across the country without any clear need based on population growth. Speculation in real estate was HOT. The jobs created, the loans generated, and false illusion of prosperity made for wonderful headlines.
I was nearly thrown out of a Foreclosure Task Force meeting in Indiana in 2006 when I dared to mention the need for a
moratorium on new construction since the city had already built more than 30,000 new homes in 5 years for only 10,000 new residents. I mentioned a college business class on supply and demand. I visited Denver in 2006 and thought they were building homes for the entire United States to move there. Then I moved to Florida and quickly observed that enough new houses were being built there for the few folks who didn’t want to move to Denver or Indianapolis. Shall I mention Atlanta, Las Vegas and twenty other cities which issued building permits without checking to see where the buyers were coming from. We are paying the piper (and we will be paying for the next ten years) for allowing an excessive amount of housing to be built. We created an economic situation which will dictate FEWER aggregate occupied households as people move to sharing homes in order to survive the financial crisis created, in part, by the ‘creative financing’ used to sell the new housing stock.
In time, the newly created rental housing market (previous homeowners, now renting again) will absorb much of the current excess single family housing but we will have changed the dynamics of communities across the countries from single family, owner-occupant to rental dwellings, perhaps housing more than one family.
Investors are the most likely purchasers for the glut of foreclosed homes which will hit the market during the next two years. As businessmen and women, they will make decisions based on totally different criteria than buyers who would be owner-occupants. Financial institutions will have no choice except to reconsider their options when holding costs, fines from municipalities and other constraints dictate they do something to stop the bleeding. Excess has its payback. The law of supply and demand will not be ignored; pretending it does not exist is a sure fire way to pay the piper.
Now About that Insurance and Title WorkIf you do not know the difference between a ‘
marketable title’ and a ‘
clear title’ this would be an excellent thing for you to research if you are planning to purchase an REO property. Suffice it to say that the REO you are purchasing can have gaps in the
title coverage which leave room for undisclosed
liens to surface after the closing and bite the new owner in the proverbial behind. Since you will have signed numerous documents which stated that you understood that you had no recourse after closing: you will not be surprised when I tell you: YOU HAVE NO RECOURSE AFTER CLOSING.
Watch for an upcoming webinar on the HOM website: “Buying REO is Risky Business”. You might want to put that on your schedule.
Copyright © 2008, Home Ownership Matters, LLC. All rights Reserved.
(Please e-mail Heather at homeownershipmatters@gmail.com with any questions, comments, or concerns you might have. We appreciate all feedback, comments, and especially your questions. Don't be shy!)
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