There has been a foreclosed house across the street from me for about 2 years. it’s been just left to rot there has been no maintenance on it at all and I can see it falling apart. Why don’t they either take care of the house or sell it? I cant imaginr them Making money on it if it’s just rotting with nobody living in it.
It could be an accounting sleight-of-hand. Suppose the mortgage was $200k, but the house is only worth $120k. Assuming the bank purchased the house for $200k at the foreclosure auction, if they sell it for $120k, they have to claim an $80k loss. If they don’t sell the house, the still carry it on their books for $200k.
I wonder this also.
As a buyer, can I contact the owning bank and make an offer?
And why wouldn’t a bank want to take a legitimate offer, just to get the home off their books? Even if they lose a lot of money (let’s use simple numbers here)… If the house is “worth” $500,000 but has been sitting there empty for 2 years, it is deteriorating. If someone comes by and offers $350,000 for it, I would think the bank would jump at the offer, even if on the surface, they are selling it at 30% under the perceived value.
Each day the house sits empty, the value decreases. The neighborhood would be better off if a family moved into it. Having an abandoned house in a nice neighborhood doesn’t exactly make surrounding house values soar. Removing a foreclosed home from the market as soon as possible should help everyone concerned. Even if the bank takes a loss, what are we talking about here?
I’ve seen bank-held homes sit empty for years… Every so often, they are put up for auction, but they have a minimum bid price, and that minimum bid isn’t offered, and the house remains empty.
I hope someone who knows real estate and/or banking (and the foreclosure market specifically) hops in here and answers, because I have been curious about this, too.
Briefly, although no one seems to be living there, and foreclosure may have begun, the house may not be completely abandoned. Here’s a news story about what can go wrong when a company contracted by a bank goes and “cleans up” a house:
Is the house truly “left to rot” or is it simply unsightly, overgrown lawn, or something? Lots of homes are owned and lived in and yet neglected. Maybe this one is no worse.
I recognize it seems stupid, the bank made a mortgage that the borrower couldn’t pay, so now it owns a house. Now what? Are they expecting a multimillionaire to buy it for cash? Are they offering a special deal on mortgages so they get this white elephant off their hands? Are they still offering variable rate mortgages? Maybe no one wants to trust them?
This isn’t entirely academic for me either. My landlord complains that without work, he can’t pay his mortgage, even though the bank is trying to help. If he defaults,I don’t think his bank will want me to pay them the rent I’m paying him, they’ll just want me out so this place can rot in peace.
Form many of the same reasons the person that took out the loan didn’t sell the house rather than default.
Person takes out a loan and buys a house for 300k. That person now owes the bank 300k. They stop making payments after they’ve paid only 50k and the bank forecloses. The bank now is owns a house and the person owes the bank $250k - the sale of the house. If the house depreciates to 0 before it can be sold that person will still owe 250k.
It’s certainly more complex than that but that’s the jist of it. The bank isn’t guaranteed to be the loser if the house sits, in some cases they might stand to lose more if they invest in advertising and selling the house.
The house itself is no longer a viable property. Only the debt on the house is viable, and up till the mortgage holder is totally unable to pay the bank, that debt remains viable and the bank can borrow against it for much more than they could against the house.
First: Banks are not property managers. They don’t want to be property managers.
They will send someone to insure the place is secured and weatherproofed - broken windows are either replaced or boarded.
Depending on the perceived likelihood of trespass or squatters, the place may be boarded up and chained.
Yes, they would love to sell the place - if it is in salable condition/location they will list it with a RE agency.
They also have a REO group which savvy investors monitor - all the properties are listed. Nowadays, the list is online.
I bought this place from a bank 2 years after it was foreclosed - some houses sell before others.
Just about every house on this street in the nearest 2 blocks has changed hands since 2008 - almost all by either foreclosure or ‘short sale’.
Entire generations of RE agents have never actually seen a short sale in the wild - it was a hypothetical creature - actually selling a house for less then what you owed.
Thanks to the ‘Junk Mortgage’, they are everyday occurrences now.
Banks (the loan originators) rarely hold the paper - after a year or two, they sell the debt and it is off their books.
With the junk mortgages, the big scandal was that these (worthless) loans were packaged and sold as A-rated investments.
A couple of the brokerages which created these ‘investments’ were allowed to die a few years ago.
Bear-Stearns comes to mind.
This isn’t true in a non-recourse state.
That’s what I was wondering, other than a fire, flood, or roof damage letting in rain, a house that starts in good shape I would expect to be able to handle 2 years without an issue. Cosmetic work is a different matter, but for most 2 years cycles a house exists it has no structural are foundational maintenance.
Correct. Non-recourse states make up a rather short list though.
From the standpoint of somebody owning one house, it makes sense to sell even at a loss. But a financial institution may be looking at a bigger picture.
Suppose they sell off these foreclosed houses for whatever they can. The price they’ll sell for will be low. That’s going to drive down house prices in general. And the people who buy foreclosed houses aren’t going to be buying more expensive regular houses.
If you have a financial stake in a hundred houses, it may make sense to let ten of them rot if it keeps the price of the other ninety high.
I think the answer can be a lot simpler – the primary concern of banks is banking, not owning real estate. Up until a few years ago, a bank-owned home was a rare thing, that a bank would only expect to have to deal with for a few months at least, and the sole procedure was “lower the price enough for it to sell quickly so we don’t have to deal with it any more” and usually a modest discount would get everything off the books before maintenance became a problem.
Now those institutions own an inventory of homes they don’t really want for much longer than they want to and they are shit at maintaining them, just because they don’t have the institutional capability.
Banks don’t sell houses – individual bank employees do. And this ‘accounting loss’ may be even more damaging to the career of the employee than the bank as a whole. One such sale at a loss may drive down his totals so that he misses out on performance ratings or bonuses. So delay that for a while. After all, the employee will probably transfer to another position in a year or two.
This, too, enters into the picture. Banks don’t want to flood the market with houses and drive prices down, so they will hold onto houses. For the same reasons, cities/counties often hold onto an inventory of tax-forfeited houses. (Though generally they hire somebody to keep them in basic repair.)
Cities try to discourage this by greatly increasing property taxes/fees on vacant houses. But these are usually passed on to the buyer (or forgiven), so they don;t help much.
Bank employees are afraid to sell a house for less than the mortgage or the amount that the house was foreclosed on. They are afraid that they will be blamed for a paper loss.
When I purchased a foreclosed house the deal almost fell through because everyone at the bank was afraid to make a decision. Before the bank foreclosed the owner had removed the wall heaters with the plan of putting forced air heating. The first time we looked at the house the asking price was $310,000 and with out heat we passed. The bank kept dropping the price to try and get an offer. My wife wanted me to relook at the house. By then the price was down to $263,000. I knew getting a heater put in would cost about $5,000. we offered $250,000. The morning of the day we submitted our offer the price dropped to $258,000. The bank accepted our offer. After the inspection we thought what the heck and noted the house had no heat and asked the bank to install heating. If they would have said no it would not have been a deal breaker. Then the fun began, we could not get an answer yes or no.
After several days of calling my agent went into the bank. He went to someone higher up the chain than what he had been dealing with. He told that person that we needed an answer now one way or the other. If the bank could not answer then it would be considered the bank was backing out of the deal and his clients (us) would begin to look at other properties. The next day he received a unsigned counter offer that the bank would pay half and we would pay half. Basically the bank was asking us to make new offer, they were not making a counter offer. We singed it and returned our new offer to the bank and nothing. He called the bank and asked to speak with the woman he was dealing with. He was told that she no longer worked for the bank and was given a new person. After many days trying to get the bank to accept the new answer nothing happen.
Our loan had a lock on the interest rate and it was going to expire and interest rates were going up. My agent went to the bank again and notified them without an acceptance by the end of business the next day we would consider the bank refusing to complete the contract, and that the contract would be canceled. That afternoon my agent received another unsigned offer of the bank paying for heating. WE singed it and faxed it back to the bank. The next day my agent went into the bank to get our copy of the offer signed by the bank. They had not signed it again it was sitting on someones desk afraid to sign it. When my agent handed the bank official our notice of cancelation of contract because the bank was not preforming it caused a reaction. He walked out of the bank with a sign offer from the bank to install HVAC at the banks cost. We signed their counter offer and kept a copy. We ended up accepting only having heat put into the house at the banks expense.
If the bank had put in a heat before putting the house on the market I believe they could have got $300,000 for the house. They almost lost the sale at $250,000 because they could not make a decision. And if our sale had not been completed the next step was to put the house up for auction.
The way some cities are handling this problem is the city pays a contractor to clean up the property and bills the owner. If the bill is no paid in 90 days the city takes possession of the property and auctions it off.
My agent’s agency had a contract with one bank chain for the upkeep of the houses they listed with them. They were paid out of the proceeds of the sale.
'zactly.
It gets worse than that. Or than the subsequent posters have said.
If a bank owns 20 derelict houses in an area, they’re carrying all 20 on their books at inflated fake values. If they sell just one, they’ll have an accounting requirement to re-price the other 19 on their books.
So it’s very easy to decide to avoid selling the first one to avoid a multi-million dollar hit to profitability this quarter. And so the downward spiral continues.
Different banks handle this issue in different ways. And you also must remember that most mortgages get sold on the secondary market, so the lender now holding the mortgage might be located several states away. As said above, banks lend money and process loans, they are not real estate management companies.
I have a friend who worked for a company that handled foreclosed properties around Atlanta for several lenders. The paperwork, requirements and procedures were mind-numbing, and differed not only from bank to bank, but from department to department and employee to employee. One of his clients wanted the properties cleaned up and sold ASAP, while others wanted the properties “secured”, but only sold at a “decent” price. And then you have the differing requirements about appraisals. Some banks will sell at a loss to appraised value, but others need a current appraisal showing the “proper” value. Which brings up the appraised value - should it be “market value”, “quick sale value”, “liquidation value” or something else.
Whenever the question is about why some large organization operates in a seemingly foolish way, the answer often comes down to some variant of the principle-agent problem.
The Bank might want to make a profit. But individual employees care about lots of other things. The rules that are created to ensure that a profit is made can end up working against them when a situation they didn’t foresee (systemic housing crash) arises.
It’s not only a hit to paper profitability. The feds require that banks keep a certain level of assets to offset the risk of the loans they’re making. If the value of the assets declines (as in 100 foreclosed houses being repriced because one sold), then additional assets have to be set aside to make up the deficit. That’s money that now can’t be loaned out.