I realize I’m being somewhat cynical today — must be something in my coffee — but I read this press release from auction firm Williams & Williams today, touting that the company is looking to buy bulk REO portfolios from lenders. The company’s logic behind this move is outlined by the W&W CEO in the press release:
“There is not a single financial institution I am aware of that likes having real estate owned (REO) properties on their books,” said Dean Williams, CEO and president of Williams & Williams. “From the traditional ‘asking price’ marketing perspective, real estate is illiquid. It immediately starts deteriorating when vacant and held for sale, while also costing the owner/seller real money to carry, market and close. These losses affect everyone, not just homeowners and their communities, and can severely restrict investor cash flow as well as net returns.”
I’ve met Dean, and he strikes me as a very smart guy. But I just don’t see the value in this particular play by his company — and, of course, I’ve already noted my concerns about hiring a TV Guide expat with no mortgage experience to run it all. I can’t count the number of investors I’ve met in the past three years that have had the “brilliant” idea of buying REO in bulk, thinking banks would love to get rid of the toxic waste — and thinking they’d then turn it on a better time frame than the bank, making a tidy profit in return. The problem with the model, no matter who the investor is, is almost always the same: the banks seem to value their REO much more highly than the investors would like. The banks are always looking to sell for a certain loss percentage, particularly when it comes to bulk transactions — and that loss percentage always equates to a price that investors balk at (or lose money on). Banks are rarely willing to sell their REO for a fixed loss percentage that allows the investor to make money, because if they did, it would mean they’re leaving money on the table that could have been used to repay the trustee/noteholders. (And the trustee/noteholders aren’t exactly a fan of that sort of thing.) That being said, it’s possible that loss experiences will eventually catch up with asset values on the bank’s balance sheets — and when they do, this will be a very lucrative play.