Selling foreclosed properties after lenders have taken possession—known in the business as REOs or real estate owned properties—is not for everyone. Prices are lower than market values, reducing commissions. Then there’s the cost and stress of cleaning up and maintaining properties that are usually ill-maintained if not outright trashed. Finally, collecting money from slow-paying banks is a pain.
Yet REOs have been the fastest growing segment of the real state business during the foreclosure boom. There’s no end in sight as forecasters predict as many or more foreclosure filings this year as last, when there were more than an estimated $12 billion in REO sales. Assuming a 1.5 percent average commission per sale, REO listing agents grossed about $184 million in fees last year.
As the wave of subprime defaults that set off the housing crisis worked its way through the system last year, the value of REO properties improved. Now that the recession and the layoffs it is generating plays a major role in driving owners into default, the average price of a foreclosure will rise from $161,755, the average in 2008. Sites like foreclosure.com and RealtyTrac carry dozens of listings in areas like southern California and Nevada priced for more than a million dollars.
In fact, there may even be more REOs out there than meets the eye, according to a report by CNNMoney over the weekend. RealtyTrac recently discovered that it has far more foreclosed properties listed it its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents. The volume of this invisible inventory could be as large 1.5 million bank-owned properties—enough to drive up inventories and depress prices. “Either lenders are overwhelmed and can’t get these properties back on sale quickly” RealtyTrac spokesman Rick Sharga told CNNMoney, “or they’re deliberately slowing down.”
In most markets, demand is strong enough that banks aren’t resorting to auction to dispose of inventory. Also, many borrowers are so heavily in debt that there is too little equity in foreclosure auction homes to attract investors. That means banks in some areas are buying back about four out of every five properties, swelling the inventory of REOs.
Even Fannie Mae has figured out a way to make a buck on REOs-by becoming a landlord. Two weeks ago Fannie announced a new policy that offers tenants of its REO properties a cash incentive to vacate the property or the option to sign a new month-to-month lease and pay the local market rate. The policy states, however, that the property being occupied by the renter will be listed for sale and may undergo repairs at any time the renter is occupying it—which could be a year or more. The lease will transfer to the property’s new owner at the time of sale.