Creative solution for dealing with foreclosed properties
Step 1: Mortgage lender turns foreclosed properties into rentals.
Step 2: Investment bank pools these new rental properties into REIT and underwrite the process.
Step 3: REIT shares sold to the public, and the properties get taken off from the book of the mortgage lender.
Advantage 1: Foreclosed properties would not hit the local property market to further depress the housing market. Good for the economy. Good for America.
Advantage 2: Investment banks get to make money.
first of all, in most cases the investment bank is typically the lender. therefore, advantage 2 should actually read:
disadvantage 1: investment bank loses a lot (think 9 digits) of money because selling price would be severely lower than book value, especially when acquiring thousands of vacant assets in one lump sum
Compared to dumping the foreclosed properties in the local housing market at fire sale price, pooling them and structuring them into rental REITs and selling the REIT shares in the capital market is a much better alternative. It would not depress the local housing market. Besides, paying investment bankers 1% underwriting fee is cheaper than paying real estate agents 6% broker fee.
i think the notion that an investment bank can simply create a REIT out of thin air is ill conceived. I've never formed a REIT before, but its my understanding that in order to create a REIT, you need investors. nobody would invest in a "rental REIT" filled with vacant foreclosed homes for these reasons:
in conclusion, nobody in their right mind would want to invest in thousands of vacant foreclosed properties unless it was at extreme discount, which would lead to huge losses for the investment bank. therefore, no investment bank in the right mind would want to execute your plan. which brings us back to disadvantage 1.
A house would be in the pool only if it is rented. There is no vacant house issue. Rental market is not that bad, compared to sales. 5% rental management fee is for retail landlord. REIT can have economy of scale or outsource that to the local bank branches. Residential REIT shares have been doing quite well compared to the physical houses.
"A house would be in the pool only if it is rented. There is no vacant house issue." -please see: rent rolls. also, banks are not in the business of renting out houses, so they would have to hire a third party, which would kill margins.
"Rental market is not that bad, compared to sales. Residential REIT shares have been doing quite well compared to the physical houses." -rental market is great for quality apartment REITs, not foreclosed homes REITs (these don't exist)
"5% rental management fee is for retail landlord. REIT can have economy of scale or outsource that to the local bank branches." - how can you have "economies of scale" for a property manager? One person can only handle so many properties, and will need to be paid at market. No matter how you slice it, the cost of overhead alone will kill your idea. i don't see how you could get away with spending less than 5% of rev to manage thousands of properties.
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