Recent Rise in REO Prices an Artificial Real Estate Rebound?
Real estate investors have recently been crying out for help as REO prices rocket and the lenders holding them make increasingly ridiculous demands but is it all an artificial rebound?
Real Market Improvements versus the Hype
There have certainly been many real improvements in many real estate markets across the U.S. over the last year, especially in hot spots Miami, Silicon Valley and a few others. However, statistics show that on a nationwide level REO prices have been gaining steam faster than retail home sales. At the same time real estate professionals have been busy telling the media that the threat of shadow inventory has evaporated and there are just a couple of weeks or months of inventory left in some cities, leading to any even more desperate surge in demand for what little is left out there.
This has been spurring bidding wars in many hot markets with cash rich funds and investors over paying for property and smaller investors barely getting a chance to get an offer in.
However, there are two major factors here that many real estate investors aren’t really paying attention too.
The first is that real estate agents are pros at hyping up deals, it’s their job. They really shouldn’t be revealing any information on other offers at all, so by telling investors or other agents they had better come in high because they already have an offer for $X they are really breaking rules and could simply be telling tall tales. Don’t fall for the hype and certainly don’t be seduced into paying too much or waiving rights to inspections or putting too much in deposit. Stick to the principals of sound investing or you will get burned.
Secondly, while there really may be only a couple of months’ worth of REO inventory actively being marketed to the public new data shows that up to 90% of REOs are being held back by lenders. Fannie Mae has even admitted almost 50% of their homes aren’t being marketed at all. These institutions don’t want to reveal how financially unstable they really are and are hoping that by controlling supply they can jump up prices and lose less.
What it means for Real Estate Investors…
Just like foreclosure auction and tax lien sales have become unprofitable for most investors due to the competition perhaps the same is true of many REOs. That’s fine, let them go, let some other poor investor lose their money on them and perhaps you can pick them up at an even bigger discount later.
Any way you look at it the opportunities for picking up discounted properties right now are far better than during the hot boom of the early 2,000s.
Dig deeper for deals and get better at reaching distressed homeowners directly instead of just relying on REOs.
Be cautious about what you add to your own inventory but have all your ducks in a row including access to flash funding so that you can move lightning fast when great deals do hit your desk.
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