Why do banks not like holding REOs

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Why do banks not like holding REOs

John Cobb
Real Estate Investor · Valencia, Spain., Select a State · Member since 2008 · 55 posts · 6 votes

I have just read an article by Joshua about REOs and in it his last point is

'Note that lenders and banks do not like holding REOs on the books, and try to get rid of these as quickly as possible.'

Why is this and what are the reasons behind it

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John Andre
Real Estate Investor · Mission Viejo, Cape Coral, CA · Member since 2008 · 218 posts · 24 votes
17y

Banks are penalized for NPN on their books. If they have a billion in dept, they are restricted from lending up to 5 times that amount by the feds.

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  • Mary R.
    Investor · Tucson, AZ · Member since 2009 · 171 posts · 27 votes
    16y

    Taxes : $1446 Tax Year : 2007
    50% rule
    income/month $1250
    expenses 50% of that - $625
    debt service and pre-tax profit. $625
    minus taxes of 120.50/mo -130 ($20.50 is 2007, not 2008) 495
    minus insurance 400/year - 33
    leaving to pay mortgage 462

    Is that right?

    I could carry a loan of 69141.48 with no pocket money. right?

    My understanding of the 50% rule then is that at 1250 a month rent, I can just afford to pay $69141.48 for it.
    The 2% rule does not work here, then, right?
    Or is it that since the 1250/ .02=65500, is less than 69, but close, I offer $62500- repairs?

    OR, what did I do wrong, what am I not understanding?
    TIA
    MRead

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  • Mary R.
    Investor · Tucson, AZ · Member since 2009 · 171 posts · 27 votes
    16y

    I didn't figure property management in it-at least 10% a month.
    MRead

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    16y
    Originally posted by M Read:
    Taxes : $1446 Tax Year : 2007
    50% rule
    income/month $1250
    expenses 50% of that - $625
    debt service and pre-tax profit. $625
    minus taxes of 120.50/mo -130 ($20.50 is 2007, not 2008) 495
    minus insurance 400/year - 33
    leaving to pay mortgage 462

    Is that right?

    ...


    No, under the 50% rule, the taxes and insurance appear in the 50% of the rent that goes towards expenses; the debt service is just PI (Principle and Interest) and NOT PITI.

    And your profit is what remains after the debt service, so typically you would allocate $100 per unit for profit (or cash flow), and then what remains is available to pay the loan.

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  • Ron Nawrocki
    Real Estate Investor · Phoenix, AZ · Member since 2009 · 61 posts · 32 votes
    16y

    I'm looking for a ex-bank CFO, Controller, Accountant, or banking consultant to help fill in the key details from a bank's perspective on the advantages of a Performing Loan vs. REO or non-Performing Loan.

    I'm working on a simple solution to the real estate & banking crises and figured this site would be a great place to find a partner on this mission.

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  • Derek W.
    Investor · Kern county Riverside County, CA · Member since 2008 · 494 posts · 261 votes
    16y

    With the recent changes in mark to market the banks aren't penalized the same way they were before. There is almost an incentive now to not have the bad asset sell. When it sells as an REO is when they have to take the loss on their books. Until then, they can pretend they are solvent. I believe this was changed with the intention of drawing out the foreclosure releases for years to come so the banks don't continue to delfate the markets and their assets.

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  • Jared RineBusiness Member
    Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes
    16y

    I'm a newbie on here and I'm glad that this was really put into a clear light for me...Thanks to all the replies.

    Jared Rine United Lending Partners53 Reviews
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