What’s Going on in REO World?

by | BiggerPockets.com

Crazy, crazy, crazy. One of the agents in my office recently got an assignment for an REO. How exciting!. Agents love REO assignments, and this wasn’t his first.

Here’s the crazy part: When I was going over the paperwork, I noticed that the property had been foreclosed upon by the lender in 2008. I couldn’t believe it, so I actually asked a title company to double check that date for me. And, yes, it was true.

So, here’s the clincher: the property is still occupied. (Talk about livin’ large; that’s three years without making a payment on anything except utilities.)

In our constant mumblings and grumblings about the distressed property market, we always talk about the famed shadow inventory. We wonder when the banks will unleash the shadow inventory of REOs on the world and we also wonder how that will impact the housing market.

Recently, I’ve heard rumors that the banks are going to be selling their inventory in bulk. And, there are public discussions about the plan to convert these bank-owned properties into rentals. (Talk about a field day for property managers.)

But, I digress. It seems to me that allowing individuals to live in properties for years at a time probably isn’t a good thing for our national economy. That being said, with all the money that those folks I mentioned saved in rent, they were able to help infuse our local economy with more hard, cold cash—shopping at Target, going to the movies, hitting the malls.

So, what’s the world coming to? Is it better for the economy for banks to hold these properties back or rent them out? Or, is it better for sellers to avoid foreclosure and sell their properties in a short sale?

What say you?

Photo: flickr creative commons by respres

About Author

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®. Before landing real estate, she had careers in education and publishing. Many folks say that Melissa is genetically pre-disposed to success with short sales. In fact, last year she and her staff obtained over 500 short sale approval letters! When she isn’t speaking with lien holders, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.


  1. Wow, three years living without paying a mortgage or rent! The problem is, did the home owners actually go out and spent those hard cash dollars or did they save them up to put a down on a home that lost over half its value? I would love to see a study about the shadow market and see if those individuals living in those foreclosed homes actually spend more within their community.

  2. …wow. Yeah, I’ve been pondering the shadow inventory for years as I sock up cash to buy a rental or two before the end of the year, or perhaps two?

    The thing is, I’ve seen wildly varying estimates of exactly HOW MUCH shadow inventory there really is. I’ve been able to get a “feel” for it by just driving streets and seeing homes unoccupied (close to 50% in some areas here in Arizona) and had a gut feeling that it was quite a bit. But the fact that some of them are still occupied? That is a bizarre revelation that throws this whole estimate into confusion.

    Is it good for the economy? Not here in Arizona, where the economy has relied pretty heavily on building and renovating homes for the (still steady) influx of disillusioned Southern Californians and out East where housing prices are still pretty high. Could it be good for me though, as an aspiring cash buyer with a good source of income who’s saving earnestly to acquire real estate on sale? Yeah. Definitely.

    I foresee a precipitous drop in rent in the coming years as these leak into the market. I think the housing prices in AZ at least won’t drop much further (they’re amazing, especially outside central Phoenix/Tucson areas.) But it’s gonna get awfully competitive to rent these houses out as they trickle back on to the market.

  3. Lets do the math. The median home price in the US in 2011 was 156,000. That’s a mortgage of around $1000/mo give a or take a few percentage points interest. That’s $32,400 in saved loan payments. With many homes purchased at 3.5% down to 0% down (or $5460 to $0) these people have made out ahead by nearly $27000 dollars in just three years. That does not count the price they would have to pay if the rented that same home or in markets where the median price is much much higher.

    So no, I do not feel sorry for these folks (not saying anyone here does). Anytime someone feels sorry for them, be sure to share the numbers.


  4. Banks have often been heartless & profit obsessed, especially when it came time to negotiate new payment terms to avoid foreclosure.
    It doesn’t take a rocket scientist to see that their past inflexibility, will eventually lead them to accept whatever alternatives are presented- anything to avoid a total loss on their investments.
    It took them a long time to figure out what alot of homeowners have, ie; you can’t get blood from a stone.

  5. It seem a bit crazy to me that a family is permitted to live in the home for such an extensive period of time following the foreclosure. I guess if in this instance, (I assume this kind of thing is rare) more power to ’em! In most cases I advise our customers to prevent foreclosure since so many of the negatives affect your future. Short sales are certainly an option if you bank permits it. At Express Homebuyers we help homeowners in the DC metro area sell their house fast and avoid a foreclosure or a short sale.

  6. I’m sure the occupants got more than 3 years of rent-free living, as more than likely it took over a year for the bank to foreclose on them due to non-payment. A big ding on their credit but with a significant amount saved (hopefully it wasn’t already spent), it’s time to move on.

  7. Wow! I bet in three years of not paying rent or mortgage the family living in that property already saved enough money to buy a new one. Anyway, they are not the only one to blame because if only the bank became strict in enforcing the rules they will not be able to stay there for such a long time.

  8. I don’t think the banks should rent the homes, especially if they are of a certain value. Renters tend to bring the value of properties down, because it’s not their property they don’t care about the neighborhood or the house.

    PLEASE don’t put renters in certain neighborhood, because then you are looking at a lot of resales.

  9. My neighbors home was sold at auction last month and is now bank owned yet life appears to be going on as usual for them. They do not appear to be in the process or expecting to leave the home anytime soon and reading this article has opened my eyes to the reality of what is going on.

    Oddly, the former owners loan was NOT underwater! In fact, having been present at the auction and witnessing the sale the BANK MADE MONEY on this sale. However, I am not sure if the lender simply bought the home back.

    I had a hard time wrapping my head around the idea that a person would default on their home loan thinking that they will not be evicted for some time to come. Where do you even start with such an idea. My neighbor is an average middle class person and as such I can safely state that credit, in one form or another, will be in their future.

    The money they have saved thus far can not begin to compensate for the cost of poor credit. Ill gotten gains ALWAYS revert to the mean and are often lost entirely.

    I see a trend of declining social morals that seems to be gaining momentum, and it worries me greatly. From the politicians, the financial industry driving the economy, to everyday average folks – everyone is out to get theirs and damn the future.

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