Are Banks Overvaluing REOs And Ruining The Market?

A recent study by two economists suggests that some banks are overvaluing properties making it impossible for homeowners to get mortgage modifications and in the end glutting the market with REOs. According to Thomas Fitzpatrick and Stephan Whitaker’s analysis of the Ohio real estate market there is currently a trend of overvaluing properties.

Fitzpatrick and Whitaker note that at foreclosed-home auctions in the Cleveland area, banks routinely sell their properties for much less than what they paid to buy them from the sheriff, meaning banks are high-balling their estimates of what those homes are worth. If they weren’t doing that, the economists write, then maybe they’d be more willing to extend loan modifications to Ohio homeowners who then wouldn’t have to give up their houses.

Obviously every market is different, but overvaluing a large number of properties when more realistic values are in line with what the homeowners can pay, will probably send more properties to the REO market. The question for investors looking to purchase these REOs is – are the properties still overvalued by the time the bank places them on the bank owned market? Also, does the growing number of REOs put future values at risk? This is where research into local markets becomes important. An REO purchase located in a highly desirable neighborhood is more likely to hold its value or increase in value even if the numbers of REOs on the market increase.

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