There was a time someone could answer questions like “how long can a bank hold an REO?” Today however the lines are blurred and bank rules are subject to multiple interpretations and vary by bank size, bank condition, regulatory agency and if in fact the rule is even being enforced.
Regulatory guidelines aside you have to ask yourself “Why a bank would want to hold an REO for any term in a market that offers no visible upside in the foreseeable future. I don’t see how anyone can argue with the following facts:
- There is an unprecedented amount or REO property currently on the market.
- There is an even more unprecedented amount of “shadow inventory” off of the market.
- There is a slowing but still continued influx of new foreclosures.
- Although sales activity has increased over the past two quarters the largest percentage of sales are from lenders which impacts owner sellers and are at best considered distressed.
- Leasing activity for office continues to be slow in most regions and the per foot cost of Tenant Improvements typically exceeds the per foot sale price of an REO property.
- Retail leasing continues to be slow with few big tenants coming to the market except for those moving to similar space for significantly “less” rent.
- Small mom and pop tenants continue to be in short supply since there are few, if any, lenders lending money for improvements to this type of tenant.
- Hospitality properties are holding steady, but there is no growth in sight.
- Warehouse leases are improving in select areas but with ultra competitive lease rates.
- It is highly anticipated that interest rates will rise in the coming quarters.
- Although inflation fears are strong it appears that inflation will be limited to consumables (food, gas, commodities) not likely real estate.
- There is certainly no tax incentive for real estate on the horizon.
- Municipalities with their deficits are not going to decrease taxes voluntarily and certainly not for “wealthy” lenders.
- And of course lenders will continue to reap the many benefits of having bank owned properties:
- Property management fees
- Property leasing fees
- Tenant improvement costs
- Real estate taxes
- Insurance at increased rates due to non owner occupied and vacant properties
- Vandalism
- Liability
- Fire
- Hazard
- Personal Injury
- Environmental
- Structural
- Maintenance
- Property Condition Assement costs
- New Appraisal costs
- Title issues
- Real Estate Sales Commission
- Oh yeah, and unlimited amounts of man hours to administrate all of the above.
Now let’s take a look at the list of reasons lenders should hold REO properties:
- They may become worth more money over time if the market improves.
So how long can a lender hold an REO? How long can you hold a hand-grenade?
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