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BoA to try Landlording to avoid Foreclosures

March 24, 2012

I assume everyone saw Bank of America’s announcement yesterday. They are piloting a program to rent homes versus foreclosing. The plan is to have homeowner’s that are obviously headed to foreclosure to deed the home over to the bank and then rent the home back from the Bank.

This sounds good for the homeowner. They will get out of their underwater mortgage without a foreclosure and get to stay in the home. My question is will they be able to pay rent when they could not make their mortgage payment? The rent might be cheaper as they will not have property taxes and insurance. It also sounds like BoA might set the rent lower than market rent. This concerns me as a landlord. First they plan to flood the market with rentals and price them below market rent. This combo has got to lead to lower overall market rents.

This will certainly have BoA in the landlord game. So they are obviously going to hire property managers, insure all these homes, pay the property taxes, etc. I just see the costs rising. I assume they met in a conference room and analyzed this to death, but I am just not sure what they are trying to do here.

I suppose they want to avoid taking write downs, but the article mentions selling these occupied rental homes to investors at some point. It seems like they would have to take the write off at that time. This sounds like just a band-aid to me and I am sure they underestimated the cost of property management. I predict their little pilot project won’t work, but I guess we will have to wait and see. If it does work then other banks will follow suit and then they are just extending the pain on this whole housing issue.

Here is the complete article.

BofA Tests an Option to Foreclosure

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From → General

6 Comments
  1. Melissa permalink

    I thought the same thing Chuck when I read the article I believe BofA should stick with lending/ banking and stay out of the rental industry.

  2. If their attempts at being a landlord run anything like everything else at that bank, then this idea will never make it out of the pilot stage. I thought Freddie, Fannie or somebody already tried this idea and they just couldn’t get it to work or never got it off the ground…

  3. Chuck –

    From what I read they are planning to secure a long-term lease and sell them to investors.

    They are doing tests in Nevada, Arizona and New York I believe. About 1,000 houses total.

    It sounds good in theory, but there are many things I don’t like:
    – I almost never want the previous owner as a tenant
    – I am sure all the properties will have a lot of ‘deferred maintenance’
    – The 3 year lease doesn’t benefit the landlord… locks rent in, if they don’t pay it has no value

    My guess is they will sell pools of these to investment funds who are aiming for a certain return.

  4. Steve,

    The pilot of just 1,000 is really small in the grand scheme of things and not even in my area (or yours). But if we fast forward and assume somehow the bank gets this pilot to work for them and then let’s assume WF, Chase, and another couple of biggies follow suit. With 6M people still behind on their mortgage payments — What would this program do to the small individual landlords if this program entered your market?

    I am not crazy about someone entering my market and locking in 3 year lease terms at below market rents.

    Lot of assumptions here, but would like to hear your thoughts on the worst case scenario?

  5. The hedge funds are starting to aggressively buy properties via all avenues (trustee sale, REOs, short-sales) in my area. BofA and other banks are going to try to target these firms to sell these properties, I have no idea of the success or appetite. I know they will be buying based on a math equation (CAP Rate) versus comparable sales.

    Can us small guys still pick up off a good amount of product? For sure! We have to get more creative and solve problems that institutional investors cannot handle (massive repairs, title issues, buyer problems, code violations). This is how I get my best deals today and I don’t think that will change.

    I think buying from burnt out landlords is going to be the model in the coming years… It will involve advertising costs, letters and more human interaction and that is fine by me. It sounds like your most recent deal was from just that.

    The good news is this will drive prices up/flatten them out until all the junk inventory is gone. I am okay with that too.

  6. I think this is there way of not taking a total loss on the loan.
    They may feel like some money is better than none.

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