Why Banks do not Manage Foreclosure Properties

With so many foreclosures across the country, banks are now beginning to own more and more of the available real estate in America. But, after the foreclosure process has ended, the banks often do nothing with these properties, leaving them to sit on the market for months or years. While the former homeowners are forced to find a new house or apartment to rent, the bank will hold onto an empty house that they take no care of. However, although the homeowners may wish to remain in their property and rent it while the bank attempts to sell it, lenders will not get into the property management business, preferring instead to let the empty house sit and bring down the quality of the surrounding community.

The bank will wait until they are able to sell the property on the open market, no matter how long this takes. All bank-owned real estate is sold in "As Is" condition, due to the fact that the bank will not manage the property or make any necessary repairs after the former homeowners move out. Even if all of the pipes are stripped of the house, or it has suffered water damage due to a sump pump breaking down during the bank's time or ownership, they will not do any repairs. But, if the bank gets a reasonable offer to purchase the home in this condition, they will be willing to consider it seriously. With the current conditions in the market, though, home buyers may be able to afford a new home in good condition, rather than potentially damaged goods that have undergone a recent foreclosure.

Even if the bank has a house in its inventory for a long period of time, they will always be reluctant to enter the property management business. This is due to one main reason: liability in case of damages. If a tenant is renting a house from a local landlord, and they incur some injury that is the owner's fault due to negligence or otherwise, the renter may be able to sue the landlord and win a judgment of several thousand or tens of thousands of dollars. This will depend on the injury suffered and how deep are the pockets of the landlord, but the tenants will not be able to get a judgment of millions of dollars, due to the fact that the landlord can not afford to pay such high damages, which will be viewed as excessive and not fitting the liability.

On the other hand, this situation could be quite different if the landlord was a large multinational bank. If the renters suffered damages, they may be able to sue for much higher amounts. For example, renters may be able to make a few rent payments of $2,000 total, and then suffer an injury which results in a $500,000 judgment against the bank. This judgment would not seem excessive, since the bank may have billions of dollars in assets. But this huge liability creates reluctance for banks to do anything with properties they own, and is one of the reasons all houses are sold on an "As Is" basis. They do not want such high potential liability when the homes may be worth far less that what they could eventually be responsible to pay.

Lenders would rather let their properties sit on the market for as long as it takes to find a buyer. They will not worry so much about broken windows due to vandalism, or newly homeless people moving into the neighborhoods and squatting in these properties. The eventual buyer will have to worry about such circumstances, and the bank does not want to have to spend any more money on these properties that they have already suffered losses on due to the foreclosure process. Letting an empty house sit, while they pay the property taxes is the most cost effective solution for lenders.

Although this situation is obviously bad for the community, it works out better for the bank (which may be based in New York, Dubai, or someplace else in the world), since they will not have to worry about being sued by tenants for millions of dollars due to justified or fraudulent lawsuits. In fact, the banks may not even have enough resources to combat all of the potential lawsuits, if they own many foreclosed homes. Thus, neighborhoods hit hard by the ongoing foreclosure crisis will experience increases in violent crime, drug trafficking, and homelessness, while current homeowners will watch the value of their houses stay low due to more run-down homes and empty properties subject to vandalism. The banks, though, will quietly wait until someone purchases these homes and avoid the legal liability of managing property. Again, it is up to the communities themselves to find ways to deal with the foreclosures, as they can not expect the lenders even to take care of the properties they now own, nor have an interest in improving the quality of live of residents living in the neighborhood.