Wednesday, June 18, 2008

They Call Him Flipper...

flipper mailbox by sheeshoo

Flipper mailbox by Sheeshoo

No, its not about our favorite Dolphin friend, its about helping lenders get REO properties off their books.

Investors have long been a staple of the REO market, and professional investorsoften bought, remodeled and sold properties for a profit. The sale price to the consumer from the investor would generally be higher since the repairs or remodeling of the property actually increased the value of the property. The difference between the cost of the repairs and the increase in value was known as an entrepenuerial return.

When the market heated up some buyers bought property to re-sell to other less informed buyers for higher prices, and in some instances created ladder schemes where a group of individuals sold a single property to a sequence of fictitious purchasers, each time for a higher price until the final buyer just walked away from a mortgage that was well in excess of the value of the property. To stop this fraudulent practice, FHA established a 90 day waiting period on resales five years ago. This however had the unintended consequence of limiting the buyers available to lenders who were selling REO properties since they would usually try to resell the property as quickly as possible after the foreclosure.

With the change in the real estate market, the record number of foreclosures in many parts of the country , and the smaller pool of available financing, FHA is reversing their policies to help lenders get REO properties off their books. They recently announced that they were lifting their 90-day waiting period on resales (see Inman News story). This will help investors in their resale efforts, since the properties are usually completely remodeled, and would easily pass such restrictions, but lenders may still face some challenges on these properties.

If a property has minor deterioration, minor repairs might meet the FHA repair standards if the house is safe clean and sound. If the property needs substantial repair the lender will have to choose between selling the property to an investor or buyer with conventional financing and making repairs to the property. Since lenders are interested in making as rapid a sale as possible, and in a cost efficient manner, they may wish to makeminor repairs to meet lender requirements, or completely rehab a property to reach a broader buying audience and achieve a higher sale price.

It will take some time to see which participants in these transactions benefit most from this change - lenders, investors, or the end buyers., but without question this change is a move in the right direction, and is probably only one of many changes we can anticipate as the mortgage and real estate industries work their way through the current market.