Why Lenders Don’t List REOs: Procedural and Practical Impediments

A recent AOL Real Estate blog post on bank-owned homes being held off the market raised a few eyebrows, even among those who acknowledge a so-called shadow inventory.

Citing data from RealtyTrac and CoreLogic, the article claimed that as many as 90 percent of all bank-owned homes are not listed for sale. That 90 percent number comes from CoreLogic. The RealtyTrac estimate is 85 percent of REOs are not listed for sale.

Both firms’ numbers paint a very similar picture: the vast majority of REO homes are not listed for sale. That doesn’t seem to make a whole lot of sense given that many Realtors I’ve talked to are asking for more inventory of properties to sell — particularly the lower-priced foreclosed homes that attract the bargain buyers and investors dominating today’s real estate market.

“We need more inventory,” said Ben Richardson, Realtor and broker with Crossroad Ventures Group in Roseville, a northeastern suburb of Sacramento. “I need more homes to show my buyers. … We are seeing multiple offers on everything. As much as I hate to see people lose their homes in foreclosure, we need more inventory from some place.”

So if there is strong demand for these properties in many markets, why are banks, lenders and other entities holding these properties not listing them for sale?

One of the reasons is that procedural and practical impediments prevent banks from listing their foreclosed homes for sale. RealtyTrac data shows that on average it takes more than six months, 195 days to be exact, from the time a bank repossess a property to when it sells that property. It’s not that the properties are never sold, but in many cases it simply takes time for the properties to be ready to sell.

22 Percent of Fannie Mae REOs Listed for Sale
The procedural and practical impediments involved here are outlined nicely in the most recent quarterly 10-Q SEC filing from Fannie Mae, which acknowledges that as of the end of the first quarter of 2012 only 22 percent of the foreclosed properties it owns were available for sale.

An additional 20 percent had an offer accepted but were not yet sold, while a whopping 48 percent were listed in the category of “unable to market” for the following reasons:

1.  Redemption status: 13 percent. These are properties where the homeowner or second lien holders still have the opportunity to redeem the property after it is foreclosed. Not all states have a redemption period, but a handful of states allow for a redemption period, ranging from a few months to a year.

2. Occupied status: 14 percent. These properties are still occupied and the eviction process is not yet complete.

3.  Rental property: 8 percent. These are properties with a tenant living in the home under Fannie Mae’s “Tenant in Place” or “Deed for Lease” programs. Under the Helping Families Save Their Homes Act of 2009, all lenders who foreclose are required to honor the terms of the previous lease and if there is no lease in place to give current tenants who were renting the home at least 90 days before eviction.

4. Properties being repaired: 5 percent. Foreclosed homes can often be in bad shape, even vandalized by the former owners or others in some cases.

5. Other: 5 percent

In a future post we’ll discuss what that “other” category might include, and whether there are cases where lenders are holding back inventory intentionally in an effort to “maximize sales proceeds” as Fannie acknowledges is part of its REO management strategy.
Find bank-owned REO properties nationwide, both listed and unlisted with RealtyTrac’s free foreclosure search.

Related News
Why Are Some REOs Already Sold or Owned by Non-Banks?
Restricted REO Side Effects
Where Have All the REOs Gone?

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