Private Investor Says Don't Enter into Foreclosures Lightly

Foreclosure Sign
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Foreclosure Sign

I thought I would share a response to yesterday's blog poston the Obama Administration considering selling Fannie and Freddie's foreclosed properties in bulk to private investors.

Rick Sharga used to work, and speak, for RealtyTrac, a well-known foreclosure sale site and tracker. He recently jumped ship to join Carrington Mortgage Holdings, which does everything from asset management to residential mortgage origination, servicing and property management.

Here's Sharga's take:

"Your posttoday made its way through our offices pretty quickly, as we’ve been doing REO rentals for several thousand properties in our own portfolio for several years, and as part of Fannie Mae’s Tenant-in-Place program. We’d probably be one of the companies you mentioned who would be interested in buying some of the GSE REO assets and turning them into rental units for some period of time. But it’s not an investment to enter into lightly.

(*Note: REO's: Real estate-owned properties are those acquired by a lender, whether a bank or the government, after an unsuccessful auction attempt.)

This isn’t the slam dunk success story for investors that some of your sources suggested today. Rental margins can be extremely thin, the probability of success varies wildly from market to market, and an investor who doesn’t understand how the financials work could be in for a rather rude awakening. Managing a large portfolio of properties across the country isn’t exactly a walk in the park either, and there aren’t a lot of companies with the infrastructure to support that sort of initiative right now.

We do think that the idea makes a lot of sense from an overall housing market perspective. Done properly, it will remove a large number of distressed properties from sales inventory (and from the dreaded shadow inventory) which should help to stabilize home prices – and, in some markets, help stabilize rapidly-rising rental rates by adding rental inventory. It would take large sums of capital that are currently on the sidelines, and put them to use, which would be a boon for the economy. It would allow the GSEs to cap their losses on these REOs, and protect the values of their portfolios of performing loans. To your point, it would clear up much of the uncertainty in the housing market today by removing the overhang of distressed properties. And the timing is right, as there appears to be a growing demand for rental housing, while many potential buyers repair their credit, try to save money for a down payment, or just decide to wait out the market before they buy.

It’s not a panacea, but could be one of the best ideas to come along since the foreclosure tsunami hit. We’re just not sure how big a wave of investors we’re likely to see once people actually do the math."

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick