Thursday, August 16, 2012

Why Banks Don't Deal on Foreclosed Homes

My friend Laurel, who is currently renting a house, was told about a foreclosed home in a neighboring community. She did some investigating on Zillow and found out the home was valued at $240,000 and through a network of friends determined the mortgage owed on the home was $350,000.

Being a determined potential homeowner and strong personality, she reached the bank that held the title prepared to offer them $200,000 in hopes that they would gladly want the asset off their hands. Not only did she receive a strong rebuff from the asset manager, but she was told they were not willing to consider less than $270,000 for it! She was flabbergasted and scratched her head when she came out of the bank.

As she was describing the scenario to myself and another friend over dinner, her main questions were:
"Why wouldn't the bank take my $200,000 and be done with it? Why wouldn't they make a deal?"
I didn't know the answer to these questions until I did a little investigative reporting of my own and spoke to a Foreclosure Legal Expert from Pulvers, Pulvers & Thompson. Here are the 3 major reasons banks don't conduct fire sales with foreclosed homes.

Reason #1: Foreclosed Homes are Assets on the Bank's Balance Sheet. 

The home is listed on their balance sheet at a value they have the property appraised at. Sometimes these appraisals may be outdated and tens of thousands of dollars off. If they dumped these properties onto the market in a big way, they could have lending problems because they would have less assets. However, it is not unreasonable to ask for a 20-30% discount on the appraised value, especially if the home has been sitting vacant for a long period of time.

Reason #2: If Thousands of Foreclosed Homes Hit the Market for Purchase, All Home Prices Would Fall. 

Think of supply and demand. According to Trulia, currently there are 13,744 homes for sale in New York City. Of which 353 (or 3%) are in foreclosure. Think if all 353 were sold tomorrow at a fraction of their value. What do you think would happen to the other 13,391 housing units? You got it! Their value would diminish, having a trickle down effect on your home, even if it is not currently for sale.

Reason #3: Banks are Trickling the Foreclosed Homes onto the Market in Order to Keep Market Prices High. 

It is estimated that only 10-15% of all foreclosed properties are on the market.

When it looks like there are not too many foreclosed properties available in an area, it helps stabilize housing values. When housing values are stabilized, market prices have the opportunity to go up. When market prices go up, the foreclosed values are higher. All of this benefits the seller and the bank when they decide to dispose of the property.

So there you have it. The banks don't deal because it is good for you, me, and them. Buying a foreclosed home is still a good idea. Just don't automatically expect a huge price reduction.



Pulvers, Pulvers & Thompson, LLP has been practicing law for over 70 years and is dedicated to providing high quality legal services to the Greater New York City Area. They assist purchasers and sellers in Residential and Commercial transactions and represent various clients in a wide range of real estate litigation matters. Contact their legal team for a FREE consultation at (212) 471-5129.

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