It is that time of the year when reports are coming out that discuss everything from the number of homes sold in 2011 to foreclosure filings. All eyes are on these reports to see if real estate market progress is occurring or if the market remains stagnant.
What, exactly, did foreclosures look like in 2011 in comparison to previous years?
A recent report revealed that there were almost 1.9 million foreclosure filings in 2011, including everything from notices of default to repossessions and auctions. At first sight, the 1.9 figure can seem incredibly high; however, it is actually significantly lower than the numbers over the last 3 years. Specifically, 1.9 million is 34% lower than 2010 and 33% in 2009; therefore, these numbers reveal that real estate market progress is being made.
When looking at the nearly 1.9 million, how many of these homes were REO properties? According the report, there were just over 800,000 REO homes put back on the lender’s books.
What is an REO Property?
A REO property is also known as a real estate owned property. These homes are reacquired by the lenders when they are not purchased at foreclosure auctions. More often than not, the lender (normally a bank or government agency) obtains the property because the home is far less than the amount owed on the loan. As a result, nobody purchases the property at auction which returns it to the lender. These REO properties are considered non-performing assets (or a loan that remains past due).
It is not shocking to see 800,000 REO homes in the report considering that a sky-high foreclosure inventory has led to a drastic reduction in home prices. When home prices fall below market value and outstanding loans are significantly higher than the value of the home, many people abandon their properties. When sending these homes to foreclosure auctions, many people are still unwilling to purchase the property for the loan settlement amount. Therefore, the home goes back to the lender and is categorized as a REO property.
REOs and Flipping Houses
Another piece of news could make 800,000 REO homes on the market even more attractive.
Today it was announced that the Federal Housing Administration (FHA) was renewing its permission to flip homes, in essence allowing investors to take out home loans guaranteed by FHA for the purpose of buying homes, renovating them, and selling them less than 90 days after the initial purchase amount. Previously this was not allowed until the FHA decided otherwise last year.
With 800,000 REO homes on the market in 2011, plus renewed permission from the FHA for house-flipping, investors could see a very opportunistic 2012.