Are Banks finally reducing the prices of their REO inventory?

Banks have built in reasons not to offer short sales or other work out programs with troubled home owners.  For instance, on a $500,000 loan where the property can be sold on a short sale for $400,000 the bank has to take an actual and paper loss of the difference.  On the same loan if the borrower makes no payments for a year the loss is a little over $32,000 at 6.5% interest.  Foreclosures, work much the same way, the cost to the bank for leaving it on the market is minor compared to taking a loss on the sales price.

The good news is that January began a new year and a new quarter.  As of late December, several Realtors have shared with me that the banks are reducing their prices.  We think that the banks are doing this for a couple of reasons.  First, they need cash to operate; there is no better way of generating cash than taking in a bunch of large payments.  Second, they believe that they can recover from the losses better this year than they could have last year. 

We also believe that this may be short lived.  The banks are only going to unload a certain percentage of their portfolios because taking a loss on all of the properties might be impossible to recover from.

I've always cautioned people looking at foreclosures to very careful not to overpay.  I still recommend being cautious but I think there are going to be many more deals over the next few weeks or months in this area.  If you have any questions about this feel free to call or comment on this post.

Bryan J May
817-929-3584