Westcoe Realtors, Riverside California…My goodness. All we here about today is the media rambling on about all the bank REO’s (stands for “real estate owned”…means the same as repo, foreclosure, etc) that are out there in America, waiting to hit the market. Mind you, they are not here yet, and have been promised for almost 2 years…and if we in the business hear the term “shadow inventory” one more time (the favorite media term for all the bank repos supposedly heading our way), our heads will spin like Linda Blair’s in the Exorcist movie (very scary…rent it with a friend).
The theory goes something like this. There are a massive number of REO’s the banks are hoarding, more on the way, and when the number of homes that are worth less than what is owed are figured into the mix, the amount of REO”s and potential REO’s are staggering. So…if we accept this most talked about opinion, then that begs the obvious question…
…Where are they? We have been hearing about this huge surplus of REO’s headed our way for over 2 years, and they have yet to show up…and so our clients ask us all the time…Where are all these REO’s they keep hearing about?
Well, let’s shed some light on that…and as usual, the answer is not so simple, nor can it be summed up in a 10 word sound bite ideal for the national news.
Remember the old TV show, Let’s Make a Deal, where contestants got to pick from Door’s numbered 1, 2 and 3? In the case of the missing REO’s, there are about 5 doors from which you can choose.
Door #1…Behind this door, the banks actually have their repossessions ready to go…they are just waiting for the best time to sell them. Mind you, with the exception of the really depressed areas of the country (not our Riverside area), they are not waiting out of a concern for the neighborhood. They really don’t care about us that much. What they are waiting for is the best time to take the loss on their books and report same to Wall Street…because the DO care about that. So…they parcel these properties out when it is best for them.
Door #2…Behind this door are the properties that the bank has foreclosed upon, but cannot take possession of because they are currently occupied by the former owner or tenant. In this case, because the government has passed so many new rules and regs that are designed to “protect” the occupants of a foreclosed home, it can take another 6 months or more to get the home vacant for sale. Those who side with the occupants feel that this added time beneficial to the former owner, and those that side with the banks think it is just a costly delay of the inevitable. Ours is not to judge, but to merely report…but there is no doubt that the time it takes to get an REO to the market for sale has doubled or tripled in the past 12-24 months. You be the judge of whether that is a good thing or a bad thing.
Door #3…In two words…”Bulk Sales”. If a particular bank has a lot (I mean a lot) of REO’s in the pipeline, there are large investment groups that will buy hundreds at a time from this particular bank. From the banks viewpoint, they get to dump a lot of properties in one swoop and eliminate the hassle of selling them all one by one. From the bulk buyers viewpoint, they get both the benefit of some really reduced prices on these homes (volume discount), and the opportunity to purchase them first. Yes, they get the headaches that come with the properties, but in theory, the end result is worth it. And what happens to these properties? Mostly they get fixed up, rehabbed, and return to the market place for sale as a standard sale. Therefore, what was once a repo is now a home with new carpet, paint, etc. for someone to buy.
Door # 4…The courthouse steps. Here, savvy investors can purchase the property from the bank before the bank actually takes ownership. These sales are done every day at courthouses through out California, and either investment groups or individuals can play…but beware, it is not for the timid or uneducated. These purchases require lots of cash, research, and nerve…and there are still risks. However, they have become quite popular, and many of the potential REO’s are sold here. Some are kept as rentals to be sold many years down the road, but most generally return to the market fixed-up for sale as in Door #3 above.
Door #5…Short Sales. In the beginning of this real estate market crash (mid 2007), there were very few short sales because the banks simply were not geared-up to handle the process. Now, almost 4 years later, short sales make up a large part of the homes currently for sale. In this case, the short sale is simply a REO in waiting, so when the bank chooses to accept a short sale price, they are simply getting rid of the “potential REO” earlier rather than later. Hence, it never becomes an official REO so it will not appear on the REO stats.
While there are other spokes to this REO “wheel”, the above 5 categories are by far the largest reasons that bank owned properties are not the huge part of the real estate market the media portrays. As a matter of fact, as of today, of all the properties listed for sale in the Riverside area MLS, 31% are Standard Sales, just 17% are REO properties, and the balance of 52% are Short Sales. Some of the short sales may ultimately wind-up as REO’s if the short sale never happens, but this huge rise from only a couple of years ago certainly shows how things have changed.
The net result of all this is that if you are one of the buyers out there that is waiting to purchase until the next flood of bank owned properties comes down the river, you may miss your boat. For a while yet, there will always be some REO properties for sale, but as you can see from the stats above, they are dwindling. Time will tell if that remains the case, but for now, be aware…there are many ways these properties get to market other than as a bank owned REO.
Take care, and as always, let us know if there is any issue you would like to see addressed in our blog.
