Tuesday, May 26, 2009

How Much REO Should A Lender Have?

Bubble Meter notes this story from Business Week:

Buyers looking to purchase foreclosures should still have plenty of opportunities. Only 30% of bank-owned properties are listed on the multiple listing services, says Rick Sharga, senior vice president at foreclosure listing firm RealtyTrac. He figures banks still own as many as 500,000 properties that they want to sell but haven't put on the market.
A home many not be listed because the bank is wrestling with title, repair or owner right of redemption issues. (Several states such as Michigan and Wisconsin give the previous owners the chance to buy back a home that's been foreclosed on). Banks may also be holding houses off the market because selling them now would lower prices even further. Foreclosures typically sell at a 31% discount to similar homes whose owners aren’t in distress. Listing all those homes now, Sharga says, “would have a devastating impact on inventory and pricing." ...

Let’s take the last idea first. No doubt listing a lot of REOs at once does have a negative impact on the market. But, the idea that lenders are holding properties off the market to maintain prices suggests a level of cooperative action for the collective good which I don’t think is occurring.

Having 70% of your REO inventory sitting around unlisted sounds bad, but is it really? There’s always going to be some down time between the foreclosure sale and the listing (evictions, cleaning and painting, etc., say 45 days). Once it’s listed, say it takes 60 days to sell. Then, it takes a while to close (say 60 days). Taking into account these factors, what percent of your inventory at any given time will be listed?


A high percentage in the list stage probably means the properties aren’t moving because the list price is too high. If you’re running an efficient REO shop, having 30% listed at any given time sounds about right.

Given the inventory of homes for sale, is it possible to sell an REO in 60 days? Apparently it is in Phoenix. The NYT, via Calculated Risk:

The low end of the real estate market [in Phoenix] — and in some equally hard-hit places like inland California and coastal Florida — is becoming as wild as anything during the boom.
One real estate agent was showing a foreclosed house to a prospective client when a passer-by saw the open door, came in and snapped up the property. Another agent says she was having the lock changed on a bank-owned home when a man happened by, found out from the locksmith that it was available, and immediately bought it. Bidding wars are routine.

The New Yorker had an interesting story in their April 6, 2009 issue on the experiences of a broker in LA specializing in REO sales (abstract here).