Rent vs Buy in Yorba Linda>Question Details

Daisy, Other/Just Looking in Yorba Linda, CA

Why don't banks rent their REO's while the houses are on the market?

Asked by Daisy, Yorba Linda, CA Mon Jul 13, 2009

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hi...many reasons....condition might not pass c of o..the risk and liablility of having tenants ...dealing with tenant occupied homes and trying to show and sell houses would not work.also, when they are sold.....the tenants would have to move.what if they become uncooperative? could cause bigger problems than it would ever solve trying to bring in a small amount of revenue through rents, upkeep, utilities, etc, etc...........bob mcclure- success mortgage partners- plymouth, michigan....
1 vote Thank Flag Link Mon Jul 13, 2009
Another reason, key words search and read, "Congress Helped Banks Defang Key Rule" by Susan Pulliam and Tom McGinty - Wall Street Journal 6/3/2009. If the mortgage investor (which is sometimes a bank, but can also be a bond fund, a pension plan, a Government Sponsored Enterprise, or etc.) changes the mortgage contract the investor must immediately book the loss on the collateral (home). As long as the original mortgage is in force, even if it's seriously delinquent, the investor does not have to account for the true loss of value in the mortgage. Changing the mortgage to a lease agreement would force accounting for the loss.

As Georgetown Law Professor Adam Levitin testified to Congress, (and I paraphrase) it seems the investors would rather delay foreclosing or short sales and offset their losses against future revenue.
Flag Sat Jun 15, 2013

First banks can do anything until they own the property......Secondly, once the lender has taken possession of the property, placing a renter in place greatly increases the difficulty of actually selling the property. Showing need to be scheduled around the occupants and renters tend not to care about the home's presentation.

This is an example of a good thought only until you understand what is really involved.....

0 votes Thank Flag Link Sat Jun 15, 2013
Supply / Demand and the Shadow Inventory:
A report published on May 30, 2013, "Joint Report on Federally Owned or Overseen Real Estate Owned Properties By U.S. Department of Housing and Urban Development Office of Inspector General and the Federal Housing Finance Agency Office of Inspector General". These two Inspector Generals note that in addition to Fannie Mae's and Freddie Mac's sizable inventory of REO properties, these two GSE's currently hold over 1.9 million mortgage loans which are in excess of 90 days delinquent. (That's just the GSE's, it doesn’t include the REO and delinquent mortgage inventories currently held by banks and other mortgage investors). These Inspector Generals are concerned about how the GSE's will handle this very large "Shadow Inventory" in the future.
0 votes Thank Flag Link Sat Jun 15, 2013
It is because the banks do not have property managers to assign to the properties and they really dont care about making a few grand a month they want the thing sold at market value so they can get there money back...
0 votes Thank Flag Link Fri Jul 8, 2011
In the past some lenders had done this, but it did not work out in their favor. First, they now have a tenant to contend with who could become a problem child in getting them out of the home when it has been sold. Second, many buyers don't care to try to buy a home that currently has a renter in it. Evictions, damage, etc. The list goes on.
Carrington Mortgage is one of those lenders to date who has rented out foreclosed homes. The idea is good on paper with having someone in the home vs. having an empty home that could get vandalized while sitting vacant. But I think CMS has had a change in mind when now faced with renting out vs. just getting the home sold as quickly as possible.
0 votes Thank Flag Link Fri Jul 8, 2011
Once the bank forecloses on a property they want to clear it out of their inventory as soon as possible. Once they become a landlord in California the tenant must be given a 60 notice to vacate the property. This would only hold up the process the bank is trying to expedite. The are in the lending money business not the real estate business.
0 votes Thank Flag Link Mon Oct 18, 2010
Because the banks are not in the business of owning property it is their goal to get them on the market and sold as quickly as possible. While renting the property on a short term basis makes sense on some levels in the long run it is not practical for the banks.
0 votes Thank Flag Link Tue Mar 2, 2010
Hi Daisy,

There are many reasons.

The main thing is that they don't want to keep these homes as inventory very long. Very few renters are willing to rent short term and have to show the home at the same time. So they don't want to take 6 month renters for instance. They are also not interested in the process of finding qualified renters and handling rental issues, such as repairs and deposits.

The other problem is getting the renters out when you sell the home. There is a chance that they might have to evict them and that adds cost and difficulties which banks simply don't want to deal with.

If someone is renting a home and it is foreclosed upon, often the bank will work with the existing tenants to continue maintaining the home, but to put new renters in....too much work for a bank.

0 votes Thank Flag Link Sat Feb 20, 2010

It is a way to offset some of their losses and risks because they don’t have to worry about vandalism to the property. Yes, some banks are opting to rent some of their non-conforming assets but banks are not in the business of renting but rather lending. I really sure hope, they stay away from that option and continue to place the homes in the market and make it available for first time buyers or investors. Our economy will be healthier if the real estate industry boosts up and stabilizes sooner.
Victoria Always, REALTOR
0 votes Thank Flag Link Tue Feb 16, 2010
Love to question why banks do what they do or don't do what they should do. Very few REO's are on the market long; what appears to be a long time is the process of foreclosure. Once the banks own the properties they generally turn them over to an agent who gets them sold quickly. It could take years to actually become an REO and be vacant that entire time. During that time the original borrowers are still owners. Hope that helps
0 votes Thank Flag Link Tue Feb 16, 2010
That's a great question! And actually, many banks are looking into this option more and more. My company, specializes in residential asset management and we deal with many banks and large investors who are looking into holding thier REO portfolios until the values recover. Leaving these homes vacant becomes a bigger liability than leasing them out since they become targets for squatters and lack of care turns them into neighborhood eyesoars. Also, banks do not have to deal with the tenant at all, that is was an experienced property management firm is for. Once the bank decides which properties they wish to retain as rentals, they hand it off to us and we handle the rent ready, marketing, leasing, and day to day operations. This turns their non-performing, losing asset into a performing part of thier portfolio. Not only that, they are providing affordable housing which is in much demand in most areas.
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0 votes Thank Flag Link Sun Aug 16, 2009
One big contributing factor is the added expenses that this would require. Just to take one issue that I deal with daily, Liability Insurance. Having a renter in these properties would expotentially increase the liability insurance costs. Add to this the costs of managing the properties and the repair costs for wear and tear and I doubt very seriously that there is any money left from the rent to make this more appealing than just letting the property sit vacant.
I am seeing an increasing trend of banks investigating this option, but I am not sure the trend will catch like wildfire.
0 votes Thank Flag Link Fri Aug 7, 2009
I had answered this question before but I just got some new info from Carrington Morgage Services (CMS). I was looking at a home that they had previously listed on the market with ReMax. They cancelled the contract however and so I called CMS directly for more info. Here's what I found out from them...

When speaking with the rep on the phone he noticed that the home was placed in the HFR program. He didn't even know what that was so he looked into it. He found out that HFR stands for Hold For Rent. Apparently, many of the homes they have listed are not going to be placed on the market for sale. Instead they are going to rent them out until the values of the homes recover.

I found this interesting and this is the first that I have heard of it so I wanted you to know!
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0 votes Thank Flag Link Sun Jul 19, 2009

What others have said are totally true, but this might change. As mentioned earlier, banks are not in the business to rent. Also, the homes sell too quickly. We receive REOs from 4 different lenders, and all get multiple offers and are off the market within days. This is partly due to availability. REOs are always available for show, no calling before and asking the tenant when one might show.

Now what is changing, is that the government is trying to dig their hands deeper into the private sector and make banks rent back homes to the owners. Now this may be ok on a case-by-case basis, but on a grand scale, this will prohibit the market from correcting itself as quickly. Now I don't know about you, but my wife and I are in the market as she is expecting and we need more space. I'm not in the market to buy a home someone else will live in and rent back from me after I buy it off the bank. I am buying for the soon-to-be 3 of us. Many of these homes will be priced in the first time home buyer range, yet this plan is more investor friendly, defeating the point of first time home buyer programs and aid.

Long story short, let's hope the banks and lenders minimize the property management aspect and focus on lending and liquidating not liquid assets such as homes.

Lars Nordstrom
Seven Gables Real Estate
Foreclosure Division
0 votes Thank Flag Link Sun Jul 19, 2009
In most cases the properties aren't in the hands of the banks very long, once they own them. REOs right now in my area are only for sale for a week with multiple offers on them, so why would the bank rent them to someone.
0 votes Thank Flag Link Wed Jul 15, 2009
Banks are not great Landlords. Property Management is a people business and they are in the money business. Can you imagine calling Wells Fargo and asking them to repair a broken sink? They just aren't set up for that kind of thing; they are in the loan business.

Make sense?
0 votes Thank Flag Link Wed Jul 15, 2009
Hello Daisy:

Banks are really in the business of loans and they are not set up to act as property managers. Additionally, most properties would need repairs and maintenance. They rather sell today and make money lending money.

Take care,

Victoria Always, REALTOR
0 votes Thank Flag Link Mon Jul 13, 2009
Just to add that many REO's are not habitable and would require $ to make it livable for tenant. Also, any renter would want to sign lease, usually 1 year minimal. Banks want to sell today.
0 votes Thank Flag Link Mon Jul 13, 2009
Both of these are good answers and all I would add is the fact that banks are not in the business of owning homes. Their focus is lending money, and home ownership opens a can of worms that not many banks would be willing. This is a logical question since it would appear that they could soften the blow to their losses, but when all is said and done, they want the past behind them quickly so they can start lending money again.

0 votes Thank Flag Link Mon Jul 13, 2009
Hi Daisey,
There are a number of reasons. You cannot believe the process and paperwork there is involved with a bank property. A tenant would only add the to mix. The bank has just gone through the process of getting the property from the owner. A tenant who refused to show the home or worse not move out when it was sold would only create more problems. I have seen tenants in bank properties when they were existing tenants when the home was forclosed on, but that is rare.
Conie Bramble
Prudential CA Realty
Web Reference:
0 votes Thank Flag Link Mon Jul 13, 2009
Hi Daisy -

There's really no need for the bank / owners to do so. The problems associated with qualifying renters, utilities liabilities, repair issues, condition of property, liability insurance etc. would cause more issues for the bank / owners than it's worth. They can list the properties at aggressive prices (vacant) and get offers quickly which will close faster vacant than occupied.

Eviction is another problem in California where it takes much longer to evict someone here in CA than it does anywhere else in the USA - and - if it's the City of Los Angeles for example, the property is subject to "rent control immediately-upon-foreclosure".

A tenant with all good intentions to move out upon notice, typically does not do so which causes closing issues and more liabilities.

It's a great thought, just not practical especially here in CA.

Best of luck !

Thom Colby
Broker / REALTOR
Orange County, CA
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0 votes Thank Flag Link Mon Jul 13, 2009
Too many Headaches.
Tenants may not be flexible when it comes to showing the property.
Plus in most states it is difficult and expensive to evict tenants.
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0 votes Thank Flag Link Mon Jul 13, 2009
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