Ouch. For banks. But good if you're a buyer.....
A new study sheds light on the cause of financial troubles of many banks (including Fannie Mae and Freddie Mac). In Massachusetts - and I suspect across the country the data would be similar and probably even worse in harder hit areas, the banks are truly taking a beating on foreclosed homes, according to Banker & Tradesman. They compiled data from all the foreclosed homes from September 2007 through February 2008, then tracked those homes over the following 6 months (through August 2008). The results are enlightening. From B&T (Sept 8 issue):
Of 4400 homes, condo, and apartment buildings sold at foreclosure auction auction over that time, lenders and investors took title to almost 4200 of them. And six months to a year after taking over the properties, they still have more than 1900 of them sitting on their books.
Interesting here, is that only 4.5% of the homes sold at the foreclosure auction to an outside buyer. The banks kept the huge majority of homes:
Massachusetts employs a three-part foreclosure process. In part one, the lender serves notice to the borrower that it is instigating foreclosure. Secondly, the lender schedules a foreclosure auction date. During the weeks and months that the first two parts take, the borrower has numerous opportunities to settle the debt with the lender. If those negotiations fail, the auction takes place and the property is sold, and is recorded as a foreclosure deed.
But there are few deals to be had at the property auction. In 95 percent of the auctions, the lender bids the full amount of the outstanding mortgage and takes title to the building. Of the 4,400 foreclosure deeds reviewed by Banker & Tradesman, just over 200 of them went to third-party buyers.
But that doesn’t mean that buyers looking to acquire foreclosed homes can’t find a good deal. It just means they have to wait until the lender has taken title.
Once the lender has taken title the property becomes Real Estate Owned (REO, for short). It will then typically get turned over to a local real estate company to maintain, evict the former owner or tenants (if necessary), make any immediate repairs required, and then put the property back on the market for sale. That process can take anywhere from a couple weeks up to a year in some cases, so I am not surprised that nearly half the properties remain unsold after 6 months, even though there is a lot of demand for REO's from buyers/investors.
In the end, banks are getting killed when they finally do sell the properties. According to the data, single familes sell for a $25,335 loss, 2 families sell for a $65,562 loss, 3 families sell for a $99,427 loss, and condos sell for a $33,012 loss (which averages out to a remarkable $44,813 loss per property). That doesn't even count expenditures for maintence, property taxes, legal fees, repairs, real estate commission, or tenant evictions, which all only add to the banks' losses.
At Charlesgate Realty Group, we maintain and sell REO properties for a number of banks, and the number of potential purchasers of these properties is surprisingly very high. The process of buying a REO property is not an easy one (I'll write more about how much fun it is to negotiate with a bank in the future, but feel free to email me for more immediate info about buying REO's) and certainly not one I'd recommend to everybody, but there are opportunities to get good bargains as seen in this data if you have good guidance.
Moral of the story: I guess you lose money (a lot of money) when you make aggressive loans on overvalued properties to buyers who can't afford to pay them back. Shocking.
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