The REO problem is worse than you think

How REOs are killing the market

This week an asset manager contacted me to get pre-listing information on a house about to be foreclosed on. Brokers who do REO work know the drill: check occupancy status, secure the property (change locks), and tell the bank what you think the house is worth if priced for a quick, AS IS sale on the market today. Then, a few weeks or maybe months later, after the foreclosure paperwork is processed, you list the house for sale, hopefully at or near the price you recommended.

Well here’s a real life example of how REO properties are killing the housing market and making this mess worse. I had no clue just how much REO properties were impacting my small part of rural America until I ran their analysis.

This particular bank had specified that for my analysis, I was to only use similar REO properties. So no matter what the condition of the subject house, all sold comps and current listings used in my report had to be bank owned properties. Makes sense, right? Comparing apples to apples, you would think.

The hopelessness in a vacant home

The subject needed a trash out. The owners obviously left in a hurry. Clothes were hanging in some closets and children’s school pictures still decorated the walls. There is an element of sadness and hopelessness that you can feel when you enter some of these properties. These people did not beat the house or take it out on the property. The just picked up and left, taking what they could, and leaving behind what didn’t fit or was no longer meaningful to them.

This house was purchased six years ago for $55,000, shortly before the market fell. As I searched for comparables, I came up with a few great ones — in similar shape and condition, just a few blocks from the subject property. But none were REOs. Some were estates and others were simply resales. All were in the $30-40,000 range for value. I could not use them.

The REO comparables I found were in the $15,000-$25,000 range. See how REOs are skewing the market? It’s a downward spiral. Because of the comps I had in front of me, this foreclosure will likely list for around $20,000. But If I was sitting in front of a seller, or a seller’s son, telling him what his parent’s house should sell for, I’d be recommending close to $35,000.

A harsh reality for this subset

We did not see the massive numbers of foreclosures that other parts of the county saw. Foreclosure properties are still only a small fraction of our sales. Yet this subset of our industry is screwing it up for the rest of the sellers. Because once this house lists for $20,000 and sells (likely to a cash buyer, an investor who will rent it out or perhaps flip it and double his money), it becomes part of the record.

Appraisers will use this as a comparable sale that could affect other sales. And if the neighbor tries to sell in the next year or two, God help him. Buyers and other agents and the appraiser will point right at this house and say “But your neighbor sold for $20,000 so what makes your house worth $35,000?”

So it’s a great time — to be an investor. To be a seller… well, hang on tight. These REO sales are going to be haunting us for quite a while.