Investors beating banks at REO game

Red tape, rehab standards only some of the reasons for discrepancy

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 18, 2011

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Red tape, rehab standards only some of the reasons for discrepancy

Steve Bergsman
Inman News™

After millions of dollars in investments, adding thousands of new staff positions and even contracting to third-party brokers, the large banks still can't sell foreclosed properties fast enough to ease the vast overhang of REOs bedeviling their books.

Meanwhile, on the dusty streets of places like Glendale, Ariz.; San Bernardino, Calif.; and Henderson, Nev., independent investors have been buying up defaulted properties, rehabbing them and putting them back into the market at a pace that makes the banks look geriatric in comparison.

"Third-party investors are much faster at reselling foreclosures than banks, though the difference varies by area," said Sean O'Toole, founder and CEO of ForeclosureRadar.

ForeclosureRadar, based in Discovery Bay, Calif., focuses only on Western states, but its research is still very relevant and predicative.

According to ForeclosureRadar data, Oregon banks took 156 days longer to sell foreclosure inventory than third parties; California, 104 days longer; Arizona and Nevada, 70 days longer; and Washington, 52 days longer.

"ForeclosureRadar statistics show real estate investors continue to far outperform banks in dealing with distressed properties," O'Toole said. "Yet, politicians and bureaucrats are putting pressure on banks to become landlords, which will hurt local economic activity as fewer properties are made available to local investors, also impacting their Realtors, contractors and property managers, as well as homebuyers in need of affordable housing."

The major blank spot in the pure data for me was, why, after so much investment and staffing, big banks still couldn't get rid of their REOs at a consistent pace. That was the question I posed to O'Toole and to the founder and CEO of another foreclosure Web program, Brad Geisen of in Boca Raton, Fla.

O'Toole and Geisen agree on a number of key points, the first being that self-interest on the part of investors is a huge motivator.

"Investors are doing this on their own behalf; it is their money involved," Geisen said. "They want to settle as quickly as possible with maximum returns."

O'Toole added, "Investors put forth their own money, and the return correlates with how quickly they get that property cleaned up and back out on the market."

Certainly, the banks would have the same goals, right?

That motivation isn't as clear for banks, O'Toole said. "Certainly, the banks are saying that is their goal, but the individual managers within the banks and even the Realtors who work for the banks don't have a couple of hundred thousand of their own money in the deal. If they did, they would have higher motivation."

Most banks pawn off all the work onto independent brokers, who are in the deal for one thing: to get a commission, Geisen said. "They don't have a financial interest in what a property sells for. They are going to do the least amount of work they can to sell that property. What you have in most cases is the banks relying on what the brokers tell them for their decision-making."

But haven't the banks hired Realtors?

"The banks have certainly hired a lot of people with great resumes on the real estate front," O'Toole said. "And they are using experienced Realtors. As an investor, I've used REO brokers in the past and they have done a fabulous job. This has more to do with efficiency of a large organization versus the efficiency of the individual. Most productivity happens inside a small business, not a mega-corporation. Individuals and small businesspeople are more motivated and productive."

The problem with big banks is red tape, Geisen said. "A lot of times the banks set up policy, and things have to go that way. In some scenarios it works well and it other cases it doesn't. One policy across the board to plan for every asset they have doesn't take into account differences."

The key point being that investors are quick to adapt to changes in the market.

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