Is the REO market drying up?

27 Replies

I'm kind of out of the loop on the REO scene since I bought my two properties in January and haven't made any offers since.

I've been told recently by someone that there are bidding wars on Fannie Mae properties now as soon as they hit the MLS, and that the banks in general are letting the defaulting owners stay in the house for very long times so the pipeline is slowing down. Is there any truth to this? (I know that it may be different in different parts of the country.)

I've been seeing intense competition for reo's, shorts, and some retail for quite some time. I've seen as many as 10+ offers and properties getting bid up well above ask. Others are gone in zero days - probably UC before they were even listed. There are a ton of cash investors around Northern Virginia. I don't know if reo's are being "held back". I think the bulk of them has come and gone.

Same here in S. Fla. , Supply is very limited for flipping, Most properties receive multiple offers within days of coming out and it's not uncommon for offers to go 10k-30k over asking. Last couple months has been really bad, over 90% of foreclosures going through auction are taken back by banks.
Freddie and Fannie homes are snatched up during the first look period. Margins are real tight on the few you can get you hands on.

Originally posted by Eddie P.:
Same here in S. Fla. , Supply is very limited for flipping, Most properties receive multiple offers within days of coming out and it's not uncommon for offers to go 10k-30k over asking. Last couple months has been really bad, over 90% of foreclosures going through auction are taken back by banks.
Freddie and Fannie homes are snatched up during the first look period. Margins are real tight on the few you can get you hands on.

Thanks for the info. I guess I will have to prepare for an aggressive search for my next one.

It is a common occurrence for the Government entities to give first look to owner occupants.This is true for HUD as well.

A lot will depend on what kind of buyer you are.If you are a flipper you will be using hard money or private financing.

If you are a buy and hold for rental then you need to look at if you are cash or using an investor loan.Banks like loans to properties that are in great shape.The problem is so do owner occupants using 100 down HUD program or FHA loans putting just 3.5% down.

In some cases the buyers are using down payment assistance form Federal,State,or local agencies so they have no money down.

All many of these owner occupants care about is "What is the monthly payment?".

Many are not concerned with cash flow or appreciation.They are looking at monthly payment and maintenance costs that could affect their quality of living standards.

This is why a huge mistake I see is investors trying to compete with owner occupants buying properties.What you want is a property in bad condition that nobody wants in a great area.You build in equity fixing it up and renting it out.The banks are willing to dump it cheap as they have limited buyers with cash ready to take the property on.

The last thing you want is to do an investor loan with a bank and outbid an owner occupant and pay too much for the property.Then when something comes up such as major repairs or a bad tenant you are losing money.

I can tell you from my REO brokers that list nationwide that inventory has all but dried up.The transactions are happening more on the short sale side now and many of these properties are in better condition than a foreclosure because the property hasn't been sitting as long and the current owners are still maintaining the properties some.Since the banks are working with them and the short sale process has been streamlined owners are getting less frustrated and doing less damage to the properties.

So my point that I forgot to make is that with more transactions happening on the short sale side there are more properties that appeal to owner occupants than to investors because the condition is generally better.

On the flip side when more properties were foreclosing and short sales were not being approved then investors had more product that needed more than carpet and paint where they could drive a bargain.

Not saying it is not still out there but the buying pattern has swung to the short sale side.

Originally posted by Joel Owens:
This is why a huge mistake I see is investors trying to compete with owner occupants buying properties.What you want is a property in bad condition that nobody wants in a great area.You build in equity fixing it up and renting it out.The banks are willing to dump it cheap as they have limited buyers with cash ready to take the property on.

The last thing you want is to do an investor loan with a bank and outbid an owner occupant and pay too much for the property.Then when something comes up such as major repairs or a bad tenant you are losing money.

.

This is certaintly the truth in my area. The listing agent will list it low to try to get one of these bidding wars started, with the OOs. If you get involved with that as an investor you'll be making high bids that you aren't comfortable with.

I have not been making offers recently. But, on my current project, I am pretty sure I was the lone bidder. I watched the price drop from $90k to $70k and started my offers around $55k. ARV is $125k to $130k. My point I want to make is that after over a dozen offers of decent houses, I finally won one from FNMA a billy goat would not live in. No way it could be financed for an owner occupant.
There are two more homes in the area I have been watching that aren't even listed yet (over 6 months). I don't think they are drying up. I just think the banks are sitting on them until their timing seems better.
Don

I don't know if reo's are being "held back". I think the bulk of them has come and gone.
Not quite true, in fact, a large amount are still held by the banking institutions and they have not been able to get to them to unloead. I will tell you that we all can expect more to hit the market towards the end of the year. Just like last year when we saw an increase of REO supply to the market, we will agin this year and I believe in a big way.

It is true that short sales have become faster to get approved and many of them go to owner occupants which reduces REO opps.

The very best that investors can look for are the ones like Don described. Homes that are in such poor condition that a billy goay would not live in removes all your retail competition which is a huge plus for the investor. Trying to bid on MLS REO properties that are close to turn-key will not have sufficient spreads in them for investors to flip.

Originally posted by Will Barnard:
I don't know if reo's are being "held back". I think the bulk of them has come and gone.
Not quite true, in fact, a large amount are still held by the banking institutions and they have not been able to get to them to unloead. I will tell you that we all can expect more to hit the market towards the end of the year. Just like last year when we saw an increase of REO supply to the market, we will agin this year and I believe in a big way.

It is true that short sales have become faster to get approved and many of them go to owner occupants which reduces REO opps.

The very best that investors can look for are the ones like Don described. Homes that are in such poor condition that a billy goay would not live in removes all your retail competition which is a huge plus for the investor. Trying to bid on MLS REO properties that are close to turn-key will not have sufficient spreads in them for investors to flip.

My impression also is that there are less owner occupant buyers (just like less renters) during the holiday season.

My impression also is that there are less owner occupant buyers (just like less renters) during the holiday season.
In many areas and for certain price points, that has held true. Owner occupant buyers don't usually like to be moving during the holiday season. That said, in some cases, it is not true, in fact, it is a busy season whereas January and February slow down. It really all depnds on where and what market, but you are right, less buyers usually in the holiday season (end of year)

I agree that you can't compete with OO's. That said, many of them won't look at anything with even the slightest cosmetic issues. The competition here is from other investors. If there are a bunch of reo's in the pipeline, I'd like to hear more about that. The loans originated at peak with the loosest underwriting are gone for the most part. The best deals around here were late 2008 - 2009. The investors have poured out of the woodwork. Buy and hold can be an ok to good deal, but decent flips (with the added transaction costs) are hard to find. I am in one of the strongest re markets. Others may have different experiences.

Cheryl, when you say you are in one of the strongest RE markets, what are you saying?

When investor competition is high, you must reduce or eliminate that competition by building relationships with the TOP REO brokers. Getting to look at deals before they hit the MLS will give you an edge.

DC is pretty strong. You are correct in that I need to get some better connections. At this point, I have no one bringing me deals. I got my last deal by going straight to the lister as soon as it popped up on MLS. I've been contacting listers of sold or UC shorts/reo's to introduce myself and ask them to call me if they have something coming up. It's crazy here with the bidding wars and I'm including properties that are gutted or trashed where every offer is cash. I'm just glad that I bought what I did in the last 30 months. It's clearly a time for patience.

Denver/Colorado Springs Metro areas still have a lot of good deals via HUD, Fannie, Freddie and all large commercial banks in terms of REOs. There are no bidding wars going on in this market as has been described by some in the NE.

Originally posted by Cheryl C.:
DC is pretty strong. You are correct in that I need to get some better connections. At this point, I have no one bringing me deals. I got my last deal by going straight to the lister as soon as it popped up on MLS. I've been contacting listers of sold or UC shorts/reo's to introduce myself and ask them to call me if they have something coming up. It's crazy here with the bidding wars and I'm including properties that are gutted or trashed where every offer is cash. I'm just glad that I bought what I did in the last 30 months. It's clearly a time for patience.

NoVA may not be the best point of comparison to other places, since there is a permanent built in government job market and resilient property values.

Montgomery Co, Maryland is the same. There were only 75 properties active on my reo list. Ugly houses are good as they scare most people away. 30 days plus on the market is the 1st step and then low ball the bank. Made 10 offers last week. 5 responded and scored one.

This was a few months ago but the actually figures nationwide was

300,000 residential foreclosures listed by banks.Another 700,000 owned by banks but not yet listed for sale.

Why would banks do this??

Simple they might not be healthy enough to take any hit currently.

OR

They already have a bunch of product out there.Putting too much out at once could flood the market making their 80,000 REO drop to 50,000.

So the banks like to release properties like a water spicket in small little bursts so the dam doesn't break.

On the pre-foreclosure residential side there is 2 million loans
in some stage of default that will have to be worked out.Whether that's ultimately a permanent loan mod,a DIL,a short sale,or a foreclosure remains to be seen.

So there are millions of properties out there.I think where people get confused is what is happening on your local level??

For instance some areas might for them at peak of REO release had 20 properties for sale.

Other areas such as Atlanta you can find thousands.So deal volume and opportunity varies.You would have to look at each banks quarterly report to see what level and type of non-performing loans they have on the books.

Many banks started up a few years ago and do not have any defaulted product to sell and are very healthy.

So even though there are a bunch of REO's coming eventually they may or may not be in your area that may have already stabilized and recovered.

Joel, you are correct that regions vary. I would go further to the County, zip and neighborhood. The unemployment rate, net migration, wealth, job creation, etc. all matter. My County (per BLS June numbers) has an unemployment rate of 4.5%. A closer-in County is at 3.7%.

Also, unlike CA, Virginia is a recourse state (although my guess is that the lenders are far too busy to go after people). One consideration here is that many people have security clearances and walking on an underwater home would be disasterous. Both of these factors cut down on "strategic defaults".

There were alot of foreclosures in 2008 and 2009 (even 2007) as the "weak hands" were washed out. These were the people that could not afford their homes from day one.

I watch inventory pretty closely and it would appear that we have stabilized. That said; my crystal ball is broken.

One other factor I forgot to mention as to why REO product is more scarce at this present moment. I can not speak for the entire country, but as far as Los Angeles is concerned (and I bet any major metro area as well would be similar), REO's are less because they are being taken at trustee sales. Trustee sales (courthouse steps) have become very competitive the last 18 months, and very competitive the last 9 months. As such, product is being purchased there at very high numbers and very low spreads. So this removes many of the would be REO's.

I don't know how these investors are making any money on these deals by purchasing at levels above 80% of value, but one of my guesses is that there is a lot of foreign money coming in on speculation for So CAL properties. They are betting that the prices will jump back up in some time in the future so they will jyust ride the negative cash flow wave until their set comes in. Not a game I like to play, but I am almost sure that is one of the reasons they are buying at such high prices to value.

Originally posted by Will Barnard:

I don't know how these investors are making any money on these deals by purchasing at levels above 80% of value, but one of my guesses is that there is a lot of foreign money coming in on speculation for So CAL properties. They are betting that the prices will jump back up in some time in the future so they will jyust ride the negative cash flow wave until their set comes in. Not a game I like to play, but I am almost sure that is one of the reasons they are buying at such high prices to value.

That is definitely the scenario here in Miami. Every morning I watch the court auctions(online here in FL), the price these people are paying makes no sense unless they are in it for the long term instead of a quick rehab/flip. Even then, they are walking into the unknown as far as condition of property, holding cost, repairs, etc. I was bidding on a house here that was worth $140k rehabbed but needed about $50k in major repairs and municipal fines. Incredibly, an investor bid it up above $120k. After a few days I check the status online and the clerk had tagged it "bidder walked", losing 5% deposit in the process about $6k+.

Makes you think some investors just bid blindly without any due diligence

Definitely lots of foreign money in this area buying up whatever inventory what they can get their hands on.

Originally posted by Eddie P.:
Originally posted by Will Barnard:

I don't know how these investors are making any money on these deals by purchasing at levels above 80% of value, but one of my guesses is that there is a lot of foreign money coming in on speculation for So CAL properties. They are betting that the prices will jump back up in some time in the future so they will jyust ride the negative cash flow wave until their set comes in. Not a game I like to play, but I am almost sure that is one of the reasons they are buying at such high prices to value.

That is definitely the scenario here in Miami. Every morning I watch the court auctions(online here in FL), the price these people are paying makes no sense unless they are in it for the long term instead of a quick rehab/flip. Even then, they are walking into the unknown as far as condition of property, holding cost, repairs, etc. I was bidding on a house here that was worth $140k rehabbed but needed about $50k in major repairs and municipal fines. Incredibly, an investor bid it up above $120k. After a few days I check the status online and the clerk had tagged it "bidder walked", losing 5% deposit in the process about $6k+.

Makes you think some investors just bid blindly without any due diligence

Definitely lots of foreign money in this area buying up whatever inventory what they can get their hands on.

Thanks for the account of what's happening on the ground in Miami. I've never been to an auction, but the bidding war mentality you describe is exactly the behavior which is warned against in a book I read about foreclosures a couple of years ago. It's bad enough to not know your comps with REOs, but it's insane to do that at auction.

I wonder how many of these people end up getting burned by liens they never researched? Then again, if they are wealthy enough, maybe they can afford to speculate like this.

I'm sure this scenario is common in most major cities that have substantial non-performing mortgages, not just LA and Miami. But as stated, this is one of several reasons why we are seeing less REO product on the market and another reason why we are seeing the banks sending out their product at top retail values because they are getting close to that at auction, so why not test the market once it becomes an REO!

If you look at margins nationwide California,Parts of Florida,New York,etc. are all speculative.

I remember a 4 or 5 years back in Miami there would be only so many condos being built and sold in a development.The investors would pay a homeless person (no joke) 100 bucks a day to stay in the line for them.They would buy up units and then immediately maybe in 1 to 2 months flip them for almost double.

The markets were totally crazy then.Same stuff in Cali where brokers were telling me trailers were going for 750,000.

So some of these investors that bought and made a ton along with foreign investors are ready to play the speculation game.They are not really in it for the cash flow.

They already have a nice portfolio and chunks of cash to allocate funds to speculative investments and if they don't all margin out they will be fine.

Speculating is fine if you have the money to lose and still be flush with cash.

So these speculative markets have very wild swings in values.First to tank down hard and first usually to start going back up.

In Georgia we have more moderate peaks and dips.So with some appreciation back but not huge swings in the future you need the cash flow as part of the deal.I don't like speculation just the hard numbers.

I will speculate to a degree on land for future commercial development but I won't buy a house that loses money every month just on the potential of appreciation in the future.