Why Don’t Banks Rent Foreclosed Property

I have toured many multi-unite rental properties for sale over the past 20 years and one basic fact holds true for all of them, the longer they have been vacant the less they are worth. Neglect, vandals, squatters and general lack of management all take their tole on the property. So why don’t banks simply rent them out while they are on the market? The answer is both simple and complex:

Simple reasons banks don’t rent foreclosed Property:

  • Banks are not in the real estate management business and are not equipped to handle the overhead of hiring and overseeing a rental property management company.
  • The ROI (return on investment) is perceived as to minimal. The costs involved in setting up an operation that would allow a financial institution to be in the property rental business (non commercial or non apartment complex) evaluated against the potential profit (both in up-keeping a properties value and rental income) is much less profitable then simply managing liquid assets (money).
  • There are no clear guidelines from government agencies in the proper use and care of bank owned property.

Complex reasons why banks don’t rent foreclosed properties:

  • Renting a foreclosed property means renting for less. This fact devalues the property in the eyes of the owner, the financial institution and can further reduce the overall sale price of the foreclosed property.
  • The financial institution which owns the property is unwilling to commit the funds for property improvement, which would make the property rental worthy. Bottom line, they will not invest in the property having already taken a perceived or real financial loss on it.
  • The vagaries of selling a property in general, favor the viewing of property once vacant over occupied. Scheduling a viewing, the appearance of the property and other factors make it more challenging to show and sell an occupied property.

The above just scratch the surface of the answer to ‘why don’t banks rent foreclosed properties’. OK, so what does this have to do with buying/selling investment property? Simple answer, it does exactly the opposite of creating an overall real estate bubble. Here are the basic effects of having a large quantity of vacant foreclosed properties (think in the millions) on the real estate market as a whole:

  1. Obviously having this inventory of distressed property in any area devalues the real estate market in general. This means the market either stagnates ( housing prices are flat) or experiences a further downturn.
  2. The inventory of viable investment properties becomes scarce, Who wants to list in a market that has recently collapsed and is presently stale?
  3. The ability to tap into equity built up over the years by current investment property owners becomes limited or non-existent.
  4. As a result of #3, funds to finance expansion of  a real-estate investment portfolio are just not available or require some serious shopping around.
  5. Underwriting and appraisal for a given property becomes more difficult, resulting in less new investment opportunities for the average real estate investor.

The solution to the answer (see above for the question and answer) is to remove these foreclosed and vacant properties from the real estate market in general and decrease foreclosures in the first place.  I have only presented an outline of the subject at hand. I will attempt to tackle the possible solutions in future posts and welcome any constructive comments on the subject.

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