Wednesday, October 15, 2008

Why Don't Banks Get Into Property Management?

This is a thought that just started going through my head and I was hoping that cyber community will help me understand why or why not this is possible. We all know that the banks are taking huge losses and a small fraction of loans are not performing anymore. The last number I heard was that 7% of sub-prime loans are not performing and I heard this on the Dave Ramsey Show. I'm sure many Realtors have seen foreclosures out there that don't need too much work. Now instead of the banks allowing them to be sold for a fraction of current market values why don't they just spend a little money to rehab, hire a property management firm and collect rent?

I understand that the banks don't want to be in real estate but I doubt that very much because I believe NAR had to lobby last year or the year before in order to keep them out of real estate. I'm not too familiar with banking laws and regulations but I'm sure they can always use another entity in order to do something like this.

In my opinion this would make sense for the market, the banks, and our industry. Foreclosures would be taken off of our inventory therefore reducing the supply. Demand is already low but has been picking up as prices have been coming down so market price should be close to equilibrium. The homes would now be occupied and stop the deterioration of some neighborhoods that have an epidemic w/ vacant homes and vandalism or squatting. They can even do lease to own and help some of these renters save up for a down payment and eventually buy that home from the bank. The bank would save on transaction costs while generating some revenue. As the market stabilizes they can begin to sell or the renter can maybe buy.

In North Hollywood, CA there are homes being sold for under $300k. A foreclosure sold for $300k nets the bank around $279k that's after deducting 7% for closing costs and commisions. If they collected $1500 per month it would be a return of 4.38% and if they collected $2000 it would be a return of 7% on $300k. Doesn't this make sense? Please help me understand.

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