Banks sell troubled assets: the rights and the wrongs of a sale

| Posted by david on June 8, 2010 |

What costs a bank more: Take back a property as an REO?  Seek out the short-sale?  Or simply sell the note ?  Let’s do an analysis of a real life transaction, the paperwork of which is sitting on my desk, where I’ve been crunching the numbers to try and find the reasoning behind this bank’s decision.

There’s a property here in Colorado that was originally sold for $540,000.  In a perfect situation, and based on the bank’s estimate of it’s worth, this property would have netted around $580K on the note.  Today, the remaining balance on this note is above $470K and, unfortunately, this property has underperformed.  Now, the bank has decided to go for a short sale, netting only $346,470 based on their best estimate.  Given the remaining principle, that’s a real discount of about 26%.  On a non-performing property, if a bank can get anything above 60-70% on the note, that might be an acceptable deal.  But it has taken an astounding nine months to get to this point and, to-date, the deal is still ongoing.  What if they let it fall into an REO situation?  That discount would grow further after considering attorney fees, holding costs, property taxes, and the countless hours of manpower they would continue to throw at it. Either way, we’re looking at a deal where the bank is losing thousands by righting these assets off at crazy discounts.

It’s time for banks to realize that the faster, less risky, and more profitable way to release these troubled assets from their financial statements is to sell the note.  A note broker can get higher offers, in a much more efficient manner, and from an increasingly large pool of buyers.  These investors are as hungry to buy at a discount as the banks are to rid themselves of underperformers.