How will this govt plan influence rental rates?

Question

Interesting plan being proposed by govt, take REO properties and turn them into rental properties (govt subsidised no doubt).

Any thoughts on what impact this will have on rental rates?

http://truthingold.blogspot.com/2012/02/feast-or-famine.html

Nathan Emmert · Answer

Rule #1 when dealing with the Government... do not attempt to apply logic.

The rules are the rules... they don't need to make sense.  Follow them, obey them, use them to your advantage when you can.  NEVER EVER EVER try to understand them, explain them, or argue them based on logic.

Mike H. · Answer

Read the link to the article above.

Whats really interesting to me is that, while I understand that there are all kinds of crazy accounting rules that make certain activities look good on paper.  At some point, when does common sense take over a bit for these banks.

It makes no sense to me that the bank would rather sit on a million dollar home getting no payments then simply foreclose and sell it.  The bottom line is they're going to have foreclose on it anyway.

Doesn't it make sense to want to do it sooner rather than later. The longer you hold it, the more it will deteriorate, the more taxes they'll owe, the less time they'll to use the proceeds of the sale to do something with.

It just seems silly to think that the accounting rules for a bank favor them to sit on a house making NO payments than to simply foreclose, sell and move on as fast as possible.

I don't care how it looks on their balance sheet. The bottom line is that money is still money. And the longer you let the asset go without returning anything, the more money its actually costing these banks in the end - UNDER ANY ACCOUNTING RULES!

These banks are simply run by people that are so worried about their stock price today, they don't make good decisions using common sense.

And anybody that wants to argue their nonsense, just take a look at the subprime loan fiasco that started this whole thing in the first place.  Bankers that were making completely ridiculous loans but did so because it was adding to their bottom line in the short run but cost the banks billions in the long run.

Mark H. · Answer

But it won't drive lease prices down.

It can't.

Even if you were getting the properties for free, these big funds are going to hire local managers, local repair people, and buy materials locally.  They're going to get skinned on repairs & maintenance, they're going to have to compete with you and me, on our own turf for tenants - the difference is, It's my money on the line, versus paid help managing the funds money.  I'm going to keep my properties up better than any paid manager.  I'm going to market my property better, because I get to keep the profit, and I'm going to answer my phone better than any paid manager, because (again), it's my money on the line.

The funds want the rental returns we're currently getting in the market, not something less.  If they drop rental rates - intentionally or not, they lose that return - so they'll try to cut corners somewhere, be it servicing the properties or maintaining them.  That's where they'll get their behinds handed to them.

Call centers in india taking repair calls, rent checks sent to a processing center in another state, property managers trying to eke out a living with 300 scattered, poorly maintained homes in their portfolios.  Even if they were initially profitable, the tenants won't like it much, and it'll begin to bite them in the behind.

As a (smart) landlord or property manager, the hardest lesson is setting up the property properly.  Removing & repairing those things that are going to cause service calls, and selecting the best tenants possible.  Saving $300 on a water heater or a dishwasher now, versus getting an emergency call (and bill) later.

The single-family rental business doesn't "scale" well.  Good residential property managers in my area select the homes they will accept carefully, and they work very hard setting a property up initially, so it doesn't become a time drain later.  Giving someone even ten homes to manage all at once and then trying to look at a spreadsheet for occupancy & rent rates and repair ratios is either going to make them "look bad" or cause exactly the behavior that you don't want in a property manager - deferred maintenance, and whatever tenants are available right now signing leases.

Give me ten million bucks to spend on real estate as an investment in my market and I'll continue to cherry pick my deals for many *many* years.  I couldn't spend even a million in a year, except possibly last year, and even then, it would have been a slow process.  I'd much rather get all *good* deals than risk one bad one.

Brian Levredge · Answer

Mike,

There's a rather simple explanation (that has already been somewhat touched on) for why the banks act the way they do with regards to jumbo loans in default.  If they were operating under normal accounting procedures, every large institution would be insolvent tomorrow.  I'm not using that as a justification for what's going on as I'm not a big fan of the large banks in the first place.  Having said that, we as a country are in no position to deal with a major banking crisis at this point in time.  You also have to keep in mind that in order for the banks to liquidate these properties, you need to have a pool of buyers that can purchase them.  Where is that pool currently?  Normally it would come from people have gained appreciation and are in essence trading paper.  Since there has been no appreciation for the most part, you have created a vacuum in the middle and upper mid segments.

I don't think REO portfolios as rentals are going to be something that most landlords should fear.  For starters, those homes are scattered all over the place in each market.  That means you are going to have multiple management companies involved in this undertaking.  In other words, you will have disinterested parties managing the properties of other (the banks) disinterested parties.  That is not a recipe for success even in the near term.

David Wedemire · Answer

Didn't this discussion come up last summer as well

James H. · Answer

Sorry, but the only useful information this article provided was that REOs may be offered to the market as rentals soon. The rest was uselss opinion and chatter.

Aside from political opinions, opinions regarding bank practices and premonitions of the ultimate demise of our country, I would be interested in hearing what some of the larger scale investors on this forum have to say regarding the more immediate and practical repercussions of REO rentals.

For instance, could this foreshadow how Section 8 works? Like, if a tentant has a voucher, would they be required to apply for these REO rentals first and then only to privately owned rentals after the REO rental supply of their particular product (2br, 3br, etc) runs out?

Carmen Alexe · Answer

The govt's entrance in the real estate rental market is in my opinion a threat to all small investors. The small investor cannot compete with the govt. The govt produces nothing (but trouble), they only take from the private sector and use whatever they take as it wishes. Therefore should the govt enter such sector it would drive the lease price down. In the meantime, the dollar debasement would reveal the price inflation (in goods and services) thus the small investor's cash flow will go down. The rents go down and the expenses go up. While a small investor would have to use a P&L for his business the govt uses no such measure. In addition to all of the above there is a major threat to becoming an economically fascist/communist country. And there is a hard price to pay for this, to include the loss of individual liberty.

Mike H. · Answer

But if they aren't getting a mortgage payment for over 90 days, the loan should be categorized as a non-performing asset. It makes no sense that the banks should be getting a pass on allowing million dollar homes to continue going forward without making payments and the bank is continuing to treat them as good assets.

Thats a huge risk to the taxpayer because that means these banks can continue to pile up non-performing homes without any consequences and we're the ones that end up on the hook to bail them out.

And then some other bank gets to come in and clean up the profits when they buy the bank back from the taxpayer again.

To me, a house that hasn't made payments in 90 days, should be every bit the negative mark on the bank as a house that they've foreclosed on and are trying to sell.

Banks need to be regulated with some common sense and need to be required to do what makes the most sense. Getting nothing from that house for 2 or 3 years costs the bank more money than getting nothing for 1 or 2.

Nathan Emmert · Answer

Mike, you're ignoring opportunity cost.

Banks have weird rules with regards to performing and non-performing assets in terms of how much capital they can lend or must have on reserve, etc etc.

Hypothetically... if they have $100k in non-performing assets which is allowing them to make $1M worth of loans which are performing, the performance of those loans may generate more profit than the loss of the non-performance loan.  If, again hypothetically, foreclosing the non-performing asset eliminated their access to the $1M they were lending and making money on... they would have good reason to keep the $100k non-performing around.

Admitting a property is non-performing has huge consequences to banks.  They aren't playing stupid because they are, they are playing the game to maximize their profit.

Raymond B. · Answer

Anthony  Halstead:
Linked for you:

http://truthingold.blogspot.com/2012/02/feast-or-famine.html

Raymond

How will this govt plan influence rental rates?

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