As predicted, Fannie is beginning to sell blocks of assets in bulk to REITs

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Submitted by bearishgurl on October 10, 2012 - 12:09am

Here, 699 "assorted" FL properties sold for $78M as "buy to let" investments to a CA-based REIT. "Future income-sharing" was made "part of the deal."

...However, the concept of selling REOs to real estate investment trusts (REITs) at a discount is a bad idea in most situations. This case is an exception since it theoretically allows Fannie to get the inventory off its books with the least amount of work possible. It also allows it to avoid dealing with multiple listing service (MLS) agents who would otherwise move the properties. Consider this as a way of moving the bad inventory with the good.

A REIT’s goal for single family residence (SFR) transactions is to produce quick and juicy profits for its investors; for SFRs this means flipping properties by reselling them as soon as possible at a higher price — the perpetual game of real estate hot potato. Management of SFR inventory is a very, very inefficient way to own income producing real estate. Thus, REITs will only purchase the properties if they are guaranteed a huge spread between the properties’ current fair market value (FMV) and the reduced price Fannie is receiving in this “garbage disposal” event.

Although this bet may yield a significant return on investment (ROI) for REIT investors, it is not a gift to the housing market at the MLS level, which will suffer a loss of properties from its resale market. Further, it feeds a rise in home prices, buoyed by this massively disruptive speculator intrusion. The only person who gains from flipping homes is the investor (and affiliate providers of real estate services if they can get in on the deal, such as property managers) — future buyers reap the consequences of inflated home prices that follow...

How this practice bodes for US regional housing markets' future sales prices is anybody's guess. In this case, I would surmise that the successful REITs are targeting properties in multiple adjacent suburban (or exurban) "lookalike" tracts for viable "bulk sale" candidates.

See: http://firsttuesdayjournal.com/silver-li...

Submitted by EconProf on October 10, 2012 - 6:27am.

Two observations:
1. This is another sign the housing market has hit bottom, and
2. This is an "efficient" market-clearing development that has more good results than bad.
It appears that large players, REITS, are discovering the profitability of buying distressed homes in bulk from government entities, fixing them up to be rental grade, renting them for 3 years, then selling them with half the cap. gain to go to the government.
I'd call that mostly good because it gets distressed and deteriorating houses fixed up and put to use, helping neighborhoods and renters seeking housing. The REITs can be far more efficient at fixup than many amature "flippers" since they have enormous economies of scale in knowing how and what to fix up, buying supplies in bulk, using the same knowledgeable contractors repeatedly, etc.
Instead of the inept government owning and (mis)managing these assets, a profit-motivated, cost-conscious private sector actor will take over, make (taxable) profits, and eventually put these fixed-up houses to better use. I'd call that mostly good.
The fact that REITs are doing this is an indicator the housing market, at least in Florida, has hit bottom, and also that large-scale landlording is a good place to be.

Submitted by scaredyclassic on October 10, 2012 - 7:43am.

it doesnt feel right.

Submitted by no_such_reality on October 10, 2012 - 8:02am.

No Econprof, those deals are dirty dirty dirty. They are ultimately insider gravyboat deals.

There is more to the story than efficient market clearing. The taxpayer is still holding the bag on some of those deals through funding. In some cases, the 'buyers' are bringing very little if any capital.

Submitted by livinincali on October 10, 2012 - 8:01am.

I personally view this as hot money chasing yield. The fed is giving money away at 0 interest and everybody is looking for a place to put that money. Investment real estate has become the primary choice due to fears of inflation and the expectation that real estate will perform well in that expected inflationary environment.

I think those assumptions will eventually turn out to be wrong. Housing will probably look good for the next couple of years as this hot money chase continues, but it's going to end at some point and hot money liquidation tends to produce really bad volatility. These investors are inexperienced in tenant management and are going to get hammered by tenant friendly laws. My guess is that by the end these hot money investors will wish they never got involved in the first place. Most are going to end up with a bunch a illiquid assets and it will be difficult to liquidate those assets to their tenants just scrapping by. Ultimately that's their buyer for higher prices later but they don't seem to realize it.

Submitted by spdrun on October 10, 2012 - 8:22am.

This has been talked about since at least last summer. I'm not convinced about EconProf's assertion that large REITs will be more efficient at managing the properties than local investors.

Local investors are often contractors or businesspeople who already have a network of tradesmen in their community. These tradesmen often give them work at a good price.

Anyway, I suspect that there will be enough properties for everyone to go around. From what I understand, the bulk sales haven't been such slick deals for the REITs: going at 75-80% of value on average, with condition unknown.

$78MM/660 = ~$118k per property. Not such a hot deal for REOs anywhere in Florida.

Submitted by EconProf on October 10, 2012 - 8:22am.

To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That's what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey...that's capitalism. At least its the private sector, not the taxpayer as at present, who loses.

Submitted by ocrenter on October 10, 2012 - 8:24am.

EconProf wrote:
To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That's what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey...that's capitalism. At least its the private sector, not the taxpayer as at present, who loses.

+1

Submitted by spdrun on October 10, 2012 - 8:28am.

No need for bulk sales or MLS for that. Each asset could be auctioned off electronically individually, with a certain amount of financing guaranteed. Investors could bid individually or in bulk as they wished.

Fortunately for the moment, there are enough foreclosures on MLS to go around in my home state of NJ. A beautiful thing indeed.

Submitted by Veritas on October 10, 2012 - 1:30pm.

ocrenter wrote:
EconProf wrote:
To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That's what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey...that's capitalism. At least its the private sector, not the taxpayer as at present, who loses.

+1


ditto Really great info. from all posters.

Submitted by CA renter on October 11, 2012 - 4:01am.

EconProf wrote:
To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That's what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey...that's capitalism. At least its the private sector, not the taxpayer as at present, who loses.

Though there might be some loss-sharing agreements, which would NOT be good for taxpayers.

Personally, I think the govt should have been auctioning these houses off to the public via a public auction site run by Fannie/Freddie. A fully transparent system where each and every transaction is visible to all, and where everyone gets a chance to bid.

That's the best way for the govt to get the best deal for taxpayers, and it's the best way for end-users to get the best deal on a home to live in (foreign concept, I know).

Submitted by spdrun on October 11, 2012 - 7:53am.

They're doing both. I suspect that they're throwing a lot of bad inventory that's useless to man or beast in with the good in the bulk sales.

Submitted by livinincali on October 11, 2012 - 8:08am.

EconProf wrote:
To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That's what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey...that's capitalism. At least its the private sector, not the taxpayer as at present, who loses.

The tax payer already lost. And selling these properties in bulk to investors at volume discount pricing means the taxpayers lost even more versus an open market auction.

Submitted by spdrun on October 11, 2012 - 8:13am.

I'm not seeing much of a discount in the Florida deal.

Submitted by no_such_reality on October 11, 2012 - 8:19am.

spdrun wrote:
I'm not seeing much of a discount in the Florida deal.

How big is the discount if you don't need to use your capital to buy it and I give you near zero financing and hand back terms if the deal does go bad?

In other words: I'll give you the down payment, I'll give you the points to get a near zero loan and you can give it back if it's a boat anchor.

For this, I get to 'sell' it for market rate, now my balance sheet looks good!, and if you make boatloads of money on rentals, I get a small slice of the profits.

That's what previous analysis I've seen shows. Can't vouch for the accuracy of their data though.

Submitted by SD Realtor on October 11, 2012 - 8:19am.

As a small time guy who used to purchase at auctions this kind of stinks. To me it is simply a case of the rich getting richer. I would have been much happier if these homes would have taken the "normal path" through trustee sale. That way the public would have gotten the same shot at the homes as the large REITs. As far as the argument that getting the homes on the market fast can now happen, well, I don't buy it. Investors that flip have crews and can actually get a flip done quicker then a large REIT depending on efficiency and focus.

Submitted by spdrun on October 11, 2012 - 8:35am.

There will still be flips. Not all foreclosures are offered via the GSEs, and the GSEs aren't selling everything via bulk sale. (HomePath has 1318 listings in CA under $150k as of this morning.)

This is also REO inventory, not a bulk trustee sale, so trustee auctions will still occur.

Come to the Northeast -- there are more shorts and REOs coming online than you'll be able to handle right now :)

Submitted by SD Realtor on October 11, 2012 - 11:38am.

I didn't say there will not still be flips. My comments were made to target the experiences of purchasing homes at trustee sale in San Diego, and making money on them. My group did it and it went well. We are just regular people. There are many other small operators who are regular people just like us.

Trustee sale flips don't involve real estate commissions, home path, other agents or any of that bs.

Programs like this take away opportunity from people like us and give it to large wall street firms.

Plain

and

Simple

I prefer San Diego over the northeast. You can have it.

Submitted by spdrun on October 11, 2012 - 11:48am.

AFAIK, this has nothing to do with trustee sales -- trustee sales will still happen. This will only affect REOs that were bought back at trustee sale by Fannie Mae. Unknown if this will be happening on a significant level in the SD area anyway.

Submitted by bearishgurl on October 11, 2012 - 12:01pm.

An avg of $111K each seems like a LOT of money to pay for FL properties in this day and age. HOWEVER, we must be mindful that for every $40K run-of-the-mill FL condo situated in well-known hurricane paths in Pacifica's portfolio for which they paid an "avg" of $111K, there is also likely a $275K ++ penthouse or SFR in a "better" complex or hood. Generally, a buyer in recent years could get a lot of "bang for the buck" in nearly ALL areas of FL in recent years.

Pacifica took a pkg deal which likely included dozens of duds along with cream-puff-type properties that just needed cleaning up.

Submitted by spdrun on October 11, 2012 - 12:04pm.

Assuming the ratio of the two is even 1:1 (doubt it, probably more average and duds than cream-puffs), the average value is something like $158k. They're buying AT MOST at a 30% discount, which is pretty normal for foreclosures. If there are only a few cream-puffs, this ratio goes waaay down.

Submitted by bearishgurl on October 11, 2012 - 1:31pm.

spdrun wrote:
Assuming the ratio of the two is even 1:1 (doubt it, probably more average and duds than cream-puffs), the average value is something like $158k. They're buying AT MOST at a 30% discount, which is pretty normal for foreclosures. If there are only a few cream-puffs, this ratio goes waaay down.

Agree to all. HOWEVER, "30% off" is not very doable, even at trustees sales, in more desirable areas of the US (such as coastal CA). In the more desirable areas, the vast majority of underwater trustors or recent years have bled every dime of equity (and then some) they could squeeze out of "their" property before accepting $3K or so from frannie to walk (after having lived in it an additional 24-40 mos for "free"). In addition, there are often jr. liens of income tax and child support and outstanding back property taxes appurtenant to the parcel on auction (avail for bid).

In most lower-cost areas of the country (incl most areas of FL), trustors weren't allowed to borrow to the degree that they did in CA (and other higher-value mkts) as their collateral didn't have as much "perceived value."

It's no wonder this deal looked attractive to a CA REIT, ESP if they are sharing future profit/loss with Fannie, mitigating some of the risk.

Obviously, many thousands of short sales sold for MORE than "30% off." This form of "debt relief" to the undeserving is what has artificially caused the rest of the RE values in the surrounding areas of the closed SS's to plummet. In these cases, the lenders just waited way too long fvcking around with deadbeat homedebtors and then threw in the towel (after 2.5+ yrs), taking it in the shorts.

The lenders who accepted deep SS prices in recent years (screwing us all) wouldn't have had to sustain losses of this magnitude had they foreclosed timely in the first place.

Submitted by spdrun on October 11, 2012 - 1:37pm.

Those "deep SS prices" you speak of tend to represent a pro-forma cap rate range of 7 to 8.5% in good coastal areas of CA. Meaning that buying is cheaper than renting, and landlords can make a profit under prevailing mortgage rates (they are, after all, providing a professional service in maintaining and managing the property). In other words, IMHO they were fair prices.

The only people who possible got unjustly fvcked were the people who bought during the bubble. And they should have known better. Investing several hundred grand is NOT to be taken lightly nor emotionally, despite the Pollyanna propaganda that the Nat'l Assoc of Realtors chooses to push on us all.

Submitted by bearishgurl on October 11, 2012 - 1:47pm.

spdrun wrote:
Those "deep SS prices" you speak of tend to represent a pro-forma cap rate range of 7 to 8.5% in good coastal areas of CA. Meaning that buying is cheaper than renting, and landlords can make a profit under prevailing mortgage rates (they are, after all, providing a professional service in maintaining and managing the property). In other words, IMHO they were fair prices.

The only people who possible got unjustly fvcked were the people who bought during the bubble. And they should have known better. Investing several hundred grand is NOT to be taken lightly nor emotionally, despite the Pollyanna propaganda that the Nat'l Assoc of Realtors chooses to push on us all.

Those "unjustly fvcked" people should include persons who bought all the way back to 12 years ago, even if they NEVER removed any equity (I'm in this category). There have only been a couple of REOs but it is the surrounding SS's have decimated the value of my property. Those properties should have instead been foreclosed upon in a timely manner and then immediately released to mkt as an REO and sold, forthwith.

However, there is light at the end of the tunnel. A "sold comp" (SS or otherwise) only lasts six months in appraisal-speak. As long as there aren't too many more "strategic defaulters" who are allowed to get away with SS, we'll all be able to recover from this debacle :=0

Submitted by bearishgurl on October 11, 2012 - 1:58pm.

As a potential seller in the next 18-24 mos, I really have no problem with "bulk sales" by REITs. If any of them are able to make a similar deal in SD Co (even for 50 properties at a time, instead of 699) this takes distressed properties off the lenders who might otherwise list them as REOs.

I'm wondering if these "bulk" purchases are even reported as individual "sold comps" by the assessor. I would guess no. Obviously, the assessor's Change of Ownership form filed by Fannie and/or the REIT's escrow officer is going to indicate "bulk sale" on each and every parcel affected.

Practically speaking, if it is reported this way, these (discounted) properties' sold prices will not affect their surrounding "sold comps" for appraisal purposes. And they will also have the effect of taking shadow inventory off the market, likely permanently. And it might spur more lenders to foreclose in order to stockpile properties for bulk sales, which are a faster way of getting them "off their books."

This is all good for current homeowners.

Submitted by spdrun on October 11, 2012 - 2:37pm.

Why bother in SD Co? REOs and shorts are getting multiple offers within 2-3 days if they're reasonably priced. Let the market decide what the value is, as opposed to backroom deals!

As to people (including yourself -- sorry, you seem like a decent sort otherwise) who bought at inflated prices, boo hoo hoo. Cry. Me. A. River. An investment shouldn't always be expected to appreciate, which is why it's called an investment. Not a "sure thing."

As far as you buying 12 years ago, if you bought at an inflated price, you took your chances and played the game. Not much sympathy from this end.

Submitted by bearishgurl on October 11, 2012 - 3:13pm.

spdrun wrote:
Why bother in SD Co? REOs and shorts are getting multiple offers within 2-3 days if they're reasonably priced. Let the market decide what the value is, as opposed to backroom deals!

As to people (including yourself -- sorry, you seem like a decent sort otherwise) who bought at inflated prices, boo hoo hoo. Cry. Me. A. River. An investment shouldn't always be expected to appreciate, which is why it's called an investment. Not a "sure thing."

As far as you buying 12 years ago, if you bought at an inflated price, you took your chances and played the game. Not much sympathy from this end.

Of late, the "market" that has been "deciding" here has consisted of "bottom fishers." However, decreasing inventory is helping to bring prices back up to 2003 levels. FWIW, I didn't "buy at an inflated price." I actually got a lot of bang for the buck at the time AND managed to receive cash back in escrow from the seller!

spdrun, you may not be familiar with what happened to many areas of CA which had heavy distress. The short sales, in particular, in those areas have had the effect of causing the RE market to (artificially) over-correct.

There were never any fundamentals in place for the market to correct back to '99-00 prices as the "loose lending" didn't come into practice until mid-2003. Owners who bought before then did so with "normal" credit standards and qualification ratios and the sales which took place during this window were nearly all "organic, traditional sales." And the prevailing interest rate in '00 to'01 for a FRM was 7-8%!

It was actually the short sales of recent years which sold for less than half their "boom" prices (and well under a "rebuild" price) which caused all surrounding owners' values to suffer. The lenders decided to accept these ridiculously low (SS) offers because they waited too long and let their FB's screw them whilst being subsidized to do so by the PTB.

This debacle is all due to a heavily "manipulated" market.

I for one am ecstatic that inventory is currently low (even if "manipulated") and hope it stays that way for years to come. What's good for the goose is good for the gander.

Submitted by spdrun on October 11, 2012 - 4:11pm.

If prevailing interest was 7-8% in 2001, with rents being significantly lower than now, the market was overpriced even then. A correctly priced market allows people to buy for a lower monthly payment than renting, with 20% or so down. In my opinion, the Bubble was in the works and housing prices were becoming unrealistic long before 2003.

I for one am ecstatic that prices in SD *are* at 2003 levels, combined with low interest rates. And that distressed inventory on the NJ side of NYC and in the boroughs is quite high at the moment. Again!

I already own two properties that have gained maybe 5-10% in value since I bought them. And I'm planning to buy more, to buy, hold, and rent. As long as rents stay higher than my payment, I truly don't give a rodent's gluteus what happens to sale prices. We're talking about dividend-producing assets here, not speculative ones.

Lastly, low inventory isn't a sign of a healthy market. It's a sign that no one wants to sell because they're underwater, and CA law allows them to squat for quite a long time without paying. A "healthy" market by your definition would have both higher prices and inventory.

Submitted by bearishgurl on October 11, 2012 - 4:19pm.

spdrun wrote:
~
Lastly, low inventory isn't a sign of a healthy market. It's a sign that no one wants to sell because they're underwater, and CA law allows them to squat for quite a long time without paying. A "healthy" market by your definition would have both higher prices and inventory.

Actually, spdrun, chronic "low inventory" is a sign that no one wants to sell because they have carefully maintained their properties over the course of decades and perhaps put $50-$100K (or more) of their own money into capital improvements. Plus, they possibly put years of "sweat equity" into them as well and so aren't going to "give them away" to "bottom fishers."

Those "underwater" owners you speak of (termed "FB's" on this site) have been washed out of the equation. They've always been at the helm of this debacle and are finally running out of options.

Yay for them!

Where one sits on this issue is where they stand. There are no doubt a lot of folks out there standing in the very same place I'm sitting right now . . . thus the chronic "low inventory" problems you're seeing out there.

You can't have it both ways.

Submitted by livinincali on October 12, 2012 - 8:04am.

The market right now is one where there is low inventory and lower sales. Sales were good in the summer but they are weakening with the lower inventory. You have buyers that aren't willing to pay significantly higher prices and you have sellers that won't sell for current market prices. It's a standoff and it could be this way for awhile.

I don't buy the over corrected due to short sales and other arguments, the fact is there wasn't a buyer at the higher prices whether you think there should be or not. There's either a buyer that will pay you your price or there isn't. If your neighbor found a buyer at a higher price you have to find your own buyer at a higher price. You only need to find and convince one to pay your price. In essence find your own sucker if you want to sell above market.

Submitted by bearishgurl on October 12, 2012 - 10:57am.

livinincali wrote:
The market right now is one where there is low inventory and lower sales. Sales were good in the summer but they are weakening with the lower inventory. You have buyers that aren't willing to pay significantly higher prices and you have sellers that won't sell for current market prices. It's a standoff and it could be this way for awhile.

I don't buy the over corrected due to short sales and other arguments, the fact is there wasn't a buyer at the higher prices whether you think there should be or not. There's either a buyer that will pay you your price or there isn't. If your neighbor found a buyer at a higher price you have to find your own buyer at a higher price. You only need to find and convince one to pay your price. In essence find your own sucker if you want to sell above market.

livinincali, the reason there aren't many buyers willing to pay prices circa when the market was ~normal (read: unmanipulated <=2003) in many local markets is because they are so used to "fire sales" at the market's "new normal" that they expect they are entitled to "fire sale" prices, even on well-located non-distressed properties which have been maintained properly. Close to zero percent of distressed property today priced at a "fire sale" price or whose seller is willing to accept a "fire sale" price has been maintained properly throughout the years ... if ever at all. Much of it literally needs to be gutted and could likely not pass a termite clearance. In any case, the (institutional) sellers will not pay for the costly tenting and repairs.

You pay for what you get in this life ... nothing more and nothing less. The "sucker" is actually the buyer (who is hell-bent on getting a "fire sale" price) who buys an REO without a Transfer Disclosure Stmt (TDS) . . . or a SS WITH a TDS where the (indigent or bankrupt) seller(s) lied through their teeth on it and also to their listing agent in order to consummate the deal and successfully dump "their" underwater property. The "sucker-buyer" then ends up finding out AFTER closing exactly what they bought (at the "fire sale" price). Practically speaking, a LOT of these issues cannot be seen and/or their extent cannot be determined by a $400 "home inspection" in escrow.

In other words, if there is a distressed listing in an area which attracts a buyer who wants it for a personal residence (but is otherwise unqualified to purchase in that area w/o buying a heavily-distressed property), there is very often a good reason for its "fire sale" price. If said listing was a "traditional or equity sale," this same "sucker-buyer" would not even be considering it, as it would be too cost-prohibitive.

A REIT getting a few of these duds in a bulk sale can recover from this pickle, due to economies of scale and being well-funded. However, such a revelation AFTER closing can be financially devastating to an individual buyer, ESP a highly-leveraged FT buyer and/or head of a family with minor children.

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