Banks Killing Zombie Foreclosures

January 10, 2017 by Nema Daghbandan, Esq.

The market crash of 2008 produced thousands of foreclosed properties across the nation, with many sitting vacant for years. Some of the hardest hit neighborhoods found banks sitting on hundreds of foreclosure properties while lawsuits or claims worked their way through the system. These properties became vacant and fell into disrepair and soon became known as “zombie foreclosures.”

It appears now that with zombie stockpiles near an all-time high, banks have finally decided to liquidate the properties and have been selling them off at a record pace. Real estate experts have noted that with new zombie foreclosure laws coming on the books in many states, combined with low-interest rates and a shortage of homes, the market is ripe for this type of bank sell-off.

The numbers are a little misleading considering the amount of vacant foreclosures has dropped nine percent from a year ago, yet the amount of bank-owned vacant properties has increased by over 67 percent, according to ATTOM Data Solutions. The group formerly known as RealtyTrac has indicated that there are an estimated 46,000 zombie foreclosures still lying dormant.

While it seems odd that there are this many vacant homes in the midst of a hot housing market, keep in mind that many of the homes are in less than desirable neighborhoods. The properties that reside in the hottest housing markets have likely been already snapped up – zombie or not. But a decrepit house in a non-desirable area may not attract investors or homebuyers anytime soon. All market indicators show that we are reaching the top of another mortgage bubble. Investors will start shying away from the purchase of properties that may need thousands in repairs unless they can buy at a price far below what the market bears.

The numbers appear to indicate the majority of zombie foreclosures are located in and around large urban centers, such as New York, Atlanta, and Chicago. While a substantial inventory of bank-owned properties would seem like a boon for real estate investors, these areas may have to wait until the market cools, the neighborhoods improve, or the bank decides to lower the bar on price. Demand may be high, but so is risk aversion. Investors will likely sit on the sidelines or look for greener pastures for which to place their investment capital.

Even though the zombie population has declined nationwide, certain areas see the numbers holding steady or even slightly increasing. States such as California and Florida saw a drop in zombie numbers over last year, yet New York, New Jersey, and Massachusetts saw a slight increase in bank-owned vacant REOs.

In a market where there seems to be an extreme housing shortage, one has to ask the question as to why there are so many unsold REOs? That question can best be addressed with the condition of the property. Savvy investors typically consider properties in any area when making a decision to purchase, as long as there is a profit to be had. This strategy indicates that the remaining vacant REOs have already been looked at and passed over. That would lead one to believe that these properties are simply the “worst of the worst” with regards to investment.

First-time homebuyers or consumers looking for a “fixer” would seemingly be good candidates for these types of properties, yet lending guidelines from banks and government-backed mortgage enterprises restrict lending on properties until repairs have been made. This conundrum leaves REO banks with the option of investing thousands into properties they may have already taken a bath on, or simply let the homes sit and hope for a cash buyer down the road. The result is apparent in states such as Michigan and Georgia where the expedient non-judicial foreclosure process has produced a glut of vacant bank-owned homes in such disrepair that they will not even attract investment buyers.

Taking all market indicators into account, it appears that banks have finally gotten the memo – dump the zombies. Banks across the country are now working with local realtors to attempt to find buyers for some of the worst zombies in their inventory. In evaluating the price of these properties, banks are apparently taking into consideration that the cost of doing nothing may now include penalties and fines from local or state governments. As the pressure from communities to clean neighborhoods of zombie properties mounts, investors will stand-by waiting until the bank sees no alternative but to unload the properties for well below market prices.