Thursday, October 25, 2007

Are Banks ‘dumping’ property?

Here's the scenario: a community has 10-15 comparable homes actively being marketed for sale in the MLS. Prices range from $300,000 to $400,000, depending on many variables, including the owner's eagerness to sell. Then, one day, a bank-owned property hits the market with an asking price of $220,000. And what's more, the property is in good condition!

I've witnessed this scenario a few times recently, and it seems to be an accelerating trend. In my opinion, here's what I think is happening:

Banks are holding more residential property than they're comfortable with. These homes are generally acquired via the foreclosure &/or short-sale process. This ties up their money which could be used for other, more profitable investments.

They realize that it's going to get worse before it gets better, so they are feeling a lot of pressure to get these homes off their books.

Banks are currently flush with cash, after making record profits in most of the last few years.

Let's say a bank is currently holding 50 homes in the Phoenix area, with an average loan balance / book value of $300,000. That's $15 million worth of property. They can continue to list the homes for sale at $300,000 each, but this will incur more costs, and they probably won't get that price anyway. Or they can sell them at $200,000 in a hurry. This will cause a paper loss of $5 million, but it clears all these properties off their books. Now they can use the $10 million they freed up to make new, more profitable loans.

Considering the current real estate environment, the banks' shareholders will be impressed with their bank's ability to get out of such a bad problem with such a small loss. The bank's stock price is likely to rise, not fall, with this news.

Yes, I think banks are starting the process of 'dumping' their REO properties.

(I realize this is an over-simplified version of a complex issue with lots of variables.  I'm more concerned with explaining what I'm seeing in the market right now than I am with the details of reserve requirements, REO departments, etc.  Please keep comments on-topic.)

So what does this do to the neighborhood? Stay tuned for a follow-up article...

- Chris Butterworth

[tags] foreclosure, short sale, bank owned property [/tags]