Wednesday, October 21, 2009

Bulk REO, Fact vs. Fiction: Part III, "Where Is All The Inventory"

Maybe you've seen this scenario: a "broker" claiming to have access to Billions of dollars worth of REOs for sale at 40 cents on the dollar (or less). And if you are/were like me, you asked yourself: "Is this for real? Could there be that much inventory? And more importantly, is there anyone really buying or selling that many homes?"

When I first started "chasing" Bulk REO I was already an experienced and successful Realtor both residential and commercial. Yet after many months of chasing these "unicorns" I realized just how ill-informed, dare I say gullible, I really was (it went so far as I was on several fee agreements for multi-billion dollar bulk REO deals). Of course I had no control of the buyer or seller, couldn't verify a thing, and just sat around hoping and praying these deals were real. They weren't; ever, and I got quite disheartened and quite dis-illusioned at the whole thing! So I started doing research to educate myself. Just how many homes were there in foreclosure in the United States? And what were they really worth? And most importantly was ANY entity out there selling or buying them in such large blocks and at such steep discounts?

According to RealtyTrac there are approximately 1.5mm foreclosed homes listed for sale. They are listed with REO brokers around the nation and anyone can look them up. Additionally through various sources I have been able to detect about another 3 million homes that are in, or are going into foreclosure this year.

How many of these 3mm are now represented in the 1.5mm listed on RealtyTrac I have no idea but it's safe to assume a certain percentage of them are already REO and the rest are somewhere between NOD (notice of default) and REO. Some predict foreclosures will be at or near this level again next year as well.

So with a little bit of 5th grade math I've figured out the following: Using 2 million homes as a base (which would mean there are at least 500,000 homes not listed on RealtyTrac but are REO and part of this years 3 million, as well as at least another 1 million somewhere between NOD and REO, also not represented on RealtyTrac, to say nothing of where the 3mm foreclosures from last year might be) and $150,000 as the current median home value in the US (which is low and conservative) we come to a total of approximately $300,000,000,000 in BPO value of ALL the homes either in or going into foreclosure in this country. This number may be much higher. I don't think its any lower.

So it seems there are hundreds of Billions of dollars worth of several million REOs in this country, many for sale. And it seems there are anywhere from 500,000 to over 1,000,000 more homes, somewhere in the foreclosure process, but not "listed" anywhere. So where are they? And are they for sale? And more importantly, are any of them for sale in bulk, at a discount? (for our purposes I am using the word "discount" here to mean under 60 cents of current BPO)

Today, if you call BofA/Countrywide, Wells/Wachovia, FDIC, FNMA, and many other of the top banks, you will discover that by and large they DO NOT SELL THEIR REO INVENTORY IN LARGE BULK POOLS AT A DISCOUNT. As of recent for example, BofA is "one off" retail selling their REO inventory at or near 90% of BPO. The same for FDIC and FNMA (I encourage you to take the time and call them yourself. Remember don't take my word for it, go find out for yourself. LOOK DON'T LISTEN).

About once a quarter I have seen FNMA release bulk pools but they have been relatively small, by bid, and from my observation not premium homes or locations (my guess they are the homes they couldn't sell retail through their REO brokers network). I've seen the same from Wells and a few other banks: sporadic releases of small bulk pools of what I'm guessing are homes they couldn't sell through REO brokers. I have also seen larger bulk pools of "rust belt" that are trading cheaply. Homes in the 5000-10000 range, and even cheaper. But if the inventory is so large as my math above seems to demonstrate, then shouldn't there be more bulk deals?

(BTW: If anyone that reads this can prove in writing they did a trade with any of the Majors above (or any other entity) in BULK (and not "one off" contracts) at a discount greater than 60% then I will gladly "eat crow" (and you will become my new "best friend")).

So if the major banks are sitting on hundreds of thousands if not millions of foreclosed homes, are not selling them in large bulk pools at significant discounts because they are getting near retail pricing on their "one off" sales, then are there any Bulk trades being done?

And where are the 500,000 to nearly 1 million homes not listed on RealtyTrac but reported? Are they all between NOD and REO?

And if these numbers are so large (the largest since the Great Depression by some accounts) then can the banks continue to "one off" sell them? Or will they need to bulk sell them at some point, at significant enough discounts, to entice "private capital"?

I will take a stab at answering some of these questions in my next post.

(Part IV coming soon)