The current real estate crisis in the US market has changed all the existing “rules” of the game. Banks and servicers who previously had REO shops of ten people or less to handle hundreds of properties are now attempting to manage REO portfolios numbering in the tens of thousands. It’s been a fast and challenging shift.
Banks have had to have a paradigm shift regarding the disposition of their REO inventory. Traditionally, once a bank’s REO department took in the asset, it would perform an analysis on the asset and list it for sale on the retail market with an REO real estate agent. This agent would simply list the asset on the Multiple Listing Service (“MLS”) used for performing real estate sales. This marketing method simply does not produce the results it once did. If the property did not sell in a certain amount of time the bank would send it to a real estate auction house. These auctions are open to the public and historically used to generate much interest. With the current overwhelming influx of REO product the auction house option is not viable. The bids have generally been so low that the banks will not accept them or the buyers fail to close. The bank wastes 30+ days with the asset in the auction process only to have contracts fail to close due to unqualified purchasers. In 2010 many servicers are seeing less than 20% closure rate at auction. This leaves 80% unsold. What to do with the asset now?
The investor – or bulk buyer – is the third, and last, method for the bank to dispose of these properties. There are investors for every type of asset the bank may have in its portfolio. The bulk buyer is typically a private fund which either maintains the property and sells it in a short period of time or has a longer holding period and does renovations and more extensive property management in preparing the property for sale or rent. After acquiring the properties from the bank, the new owners are typically very diligent about executing on the assets.
The bulk buyer investor provides crucial liquidity to the banking system. In efficiently disposing of the REO product for banks, it frees up capital that enables banks to loan to new homeowners and not waste time and resources in maintaining these properties. The disposition of these properties to owners who will maintain and upgrade them benefits communities and neighborhoods where these properties have become eyesores. This, in turn, helps maintain property values in the areas where the REO properties are located.
The investor provides liquidity to various holes in the market which, without the investor to fill, would make the current foreclosure market linger even longer than it currently has. Many banks have been slow to accept bulk sales and the investor as a method of disposition. However, as the market has matured, it has become obvious to all that the investor is not only a viable method of disposition, but a necessary and beneficial one. As the delinquent and foreclosure pipelines begin to feed the REO inventories at faster rates than they have over the last two years, the investors will be the only viable way to fill the gap between the supply of inventory and the low demand for houses on the retail level. This, in turn, will speed the recovery of the market to stabilize home prices and bring much needed bank liquidity into the system.
At BriarPath, we see this as a great opportunity and look forward to what the upcoming years bring in terms of investment opportunities in the REO market.
