Cost of REO to Banks

I would like to better understand the cost of REO to the banks to give me a better understanding of how to deal with them. Lets assume that the bank has $100,000 invested in a house, with total taxes of $100/month. Assuming that the 30 yr mortgage interest rate is 6% the cost of that mortage would be $600/month. So would a good estimate of carrying cost for the bank be $700/month? A few other things to consider: 1) I would assume that the bank borrows the money at a lower rate than 6% so the carrying cost will be lower than I estimated? 2) The bank maybe eager to raise capital so their carrying cost maybe higher than my estimate? 3) They maybe paying some additional fees to the real estate agent? 4) They are probably insuring the property are concerned about damages to the house since no one is looking after the property? I am not sure how to take those factors into account... any help would be appreciated. Thanks Jay

1 Answer

Each bank has its own set of financial circumstances.  The carrying cost may vary, but not having the asset on the books is of primary importance to the bank.  Reasonable offers that do not result in the bank investing further dollars into the property is also very important.  The lost interest on the mortgage, although a foreclosure judgment will allow for accrual of interest on the amount owed, is realy only a minor consideration.  Attorney costs have been built into the judgment,  Realtor commissions have not. 

Usually, but not always, the appraised value of the foreclosed property is less than what is owed.  If a bank can take an offer from a good buyer for, say $80,000, it may decide to sell and recoup that part of its investment now and to pursue the shortfall through other means.  Where the property is located, how large a pool of potential buyers, condition of the property and other factors will all play into a decision to sell at a particular price.

The bottom line is that there is NO MAGIC FORMULA that someone can determine what carrying costs a lender may incur such as property taxes, etc.  The best thing to do?  Look in the Registry of Deeds and find out what the amount of the judgment is and what the original loan balance was from the mortgage deed or deed of trust.