Bank Trend to Delay Sale of REO Home: Scenario One
Mark Anderson, Owner’s Network Real Estate- Broker, Realtor®, Green designation
Published July 21, 2009

One reason that the bank may not be to eager to sell their REO’s is this simplified scenario. First, by selling now at the bottom of the market, they will recover only about 70% that was originally lent to the home owner. This could be 50 to 100’s of thousands of dollars-- more if a luxury home. This is an immediate and permanent loss of 30% to the lending institution.

However if they wait, 6 -12 months or more, they may be able to sell the property at less of a loss in an improved real estate market. At a 10% gain in home values, they stand to loose 10% less of the money than they lent to the homeowner. This can amount to 10-50 thousand dollars gain on the REO. Multiplied by hundreds of homes in their REO portfolio, this can add up. This is to be balanced by the loss of income that they originally would have gained had the mortgage stayed on the books earning interest.

The gain obtained by waiting for a better market could be a significant amount compared to putting the home sale amount to work in their business today. In numbers, a $200,000 home sold today would allow placing the sale proceeds into an 5% investment and could net the bank $10,000 in a year. Waiting 1 year for the home to recover some of the 30% or more loss in the market, assuming a 10% appreciation may result in a home with approximate value of $220,000. That’s a $20,000 gain vs. the $10,000 re-investment interest income for one year. Even paying a 3% real estate buyer’s commission that’s, at worst, a break even proposition with an upside gain for waiting out the market. For a bank with significant cash reserves, this could be a good investment gamble.

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