REO MARKET WATCH June 09

 by Barton D Fenton           

I don’t want to jinx it, but it seems like something is going on in the secondary market for REO. In the last 60 days or so it seems like wholesale pricing is firming up. A lot of buyers who abandoned the market last year during the values crash are coming back and nosing around. They are even starting to bid again. Dare we hope?

There is no question that the prices for California REO – the most sought after product in the Country – have come up a bit. There is a substantial speculation that we may be getting close to the bottom of the decline and it is time to buy again. Even though retail values continue to drop – albeit at a slower pace – wholesale prices have increased slightly and appear to be stabilizing. The gap between wholesale and retail is shrinking somewhat and may be indicative of a changing market.

As one battle weary Bank Trader put it the other day, “Maybe the light we are seeing at the end of the tunnel isn’t another freight train coming our way – this time”. One REO manager for a local Southern California Savings & Loan told me that they had no present plans to sell bulk REO because in March they had sold over 400 units through retail real estate brokers. He said that since they closed most of them above 90% of the listed price, there wasn’t any need to sell wholesale bulk portfolios. He suggested I check back in three months. Another Asset Manager said his company was pulling all of the newer REO assets also, and transferring them to retail real estate brokers. He indicated that they would be recompiling REO ‘tapes’ with only the dated units because the retail guys were having surprising success selling the more recent low-maintenance stuff.

Have prices finally come down enough to lure the buyers back? It was only a couple of years ago the banks (pre-bailouts) were scrambling to obtain liquidity by selling off distressed bulk real estate assets at prices very attractive to investors. The most popular exit strategy was as simple as ‘flipping’ the product to another buyer or liquidating through auctions. Last year as values declined at twice rate of the previous year, the flippers started taking a beating. Values were decreasing faster than they could move the assets. The prudent strategy became ‘buy and hold’. This year as the price plunge has noticeably slowed many investors are finding that they can now acquire assets at prices low enough that they can immediately rent them out at a positive cash flow. How long has it been since that was possible without heavy leveraging?  

The entrepreneurs are returning to the market with new ideas on how to create profits. Some are opting to creatively move product as “rent to own” packages. The marketing is easy. There are plenty of potential clients and the pitch is attractive. ‘Lost your home? Credit destroyed? Move into a new home as a buyer – now -with a small deposit and payments you can afford. We will record your option on title so you can benefit from the tax advantages of home ownership and we will report your payments to the credit bureaus so you can begin to rebuild your credit rating immediately!’ Others have found some success converting vacant apartments into senior housing. It is still a buyers market. The product is out there and with a little creative thinking and imagination the opportunities are, too. The innovations these people come up with is one of the things I love about this Country. No matter the circumstances, the entrepreneurs will find a way to make things happen.

Dare we hope that light at the end of the tunnel is daylight and not another freight train coming our way? Summer is here and historically the next few months should account for something like eighty per cent of SFR sales. Bulk sales traditionally heat up around the same time and according to WCB CEO, Ralph San Roman, bidding is lively and almost any available bulk assets generates immediate offers. Locally, real estate agents are saying they are busy again and getting multiple bids above their asking prices. So things appear to be heating up. Is it just a small summer ‘bump’ or are we seeing the beginning of some stability returning to the market?

Always the optimist, this morning I pulled an old sign my father gave me out of my garage, dusted it off and hung it up. The message is simple’ “Please God, give me one more real estate boom – this time I promise not to piss it all away”.

Amen.