With an estimated two million homes in various stages of foreclosure today, the real estate market is struggling to restore some semblance of normalcy. Typically, banks – inundated with scores of foreclosures on their balance books – seek to rid themselves of these distressed properties by putting them up for sale at foreclosure auctions. That process typically gives them the best return on their investment, but it can be slow, costly, and ultimately unsuccessful.
Bank of America, one of the largest banks in the country with one of the largest foreclosure inventories in the country, is taking a new approach to dealing with foreclosures: demolition.
The bank announced plans to donate 100 foreclosed properties in the Cleveland, Ohio area to local organizations and, in many cases, bulldoze them to the ground in conjunction with a local agency that helps to manage blighted and undesirable properties. They also intend to do the same in Detroit, Chicago, and other cities.
Other major lenders reportedly are following their lead.
It seems crazy that lenders would demolish perfectly good homes, even ones that require major repairs. But, in this day and age, the crushing weight of foreclosure inventories are bearing down on lenders and restricting their efforts to lend elsewhere to help people pay for traditional homes (or foreclosure purchases).
This leads us to address one popular question with investors and homebuyers: How much does a foreclosure cost a bank?
The first answer to that question is a simple one. Banks rarely recoup the initial amount of the loan (when you add the amount of money already paid on the loan) through foreclosure. So, right off the bat, the mere fact that a home enters foreclosure drops the value of the home to the bank by a few percentage points. This is because it costs money in legal fees and time to bring a home to foreclosure.
Additional costs include the cash value lost on the home that otherwise would have been repaid. It’s not so much the lost principal, either; due to amortization, lenders lose most of their money through foreclosure due to lost interest payments, especially in the first few years of a home loan.
Lenders also have to pay property taxes. Due to the long average processing time of foreclosures today – a national average of roughly 400 days – property taxes become a costly issue when multiplied by the number of distressed properties in a lender’s inventory.
This is why some lenders are choosing to simply donate a home and raze it to the ground – sparing them the above costs plus maintenance and upkeep and other related fees and costs that can collectively run up to $70,000 per home.
This is also how you can get a great deal on a foreclosed home. The cost of a foreclosure is a prime motivator for banks to empty their inventory – and that means working with you either directly or through foreclosure auctions to move these homes quickly and efficiently.
High costs also help make short sales more attractive to lenders, so you have more options to choose from when buying a foreclosed home – and more leverage in the negotiations.