REO-to-Rental: More Than a Trend

DEC 13, 2013 3:04pm ET

The continued progression of the REO-to-rental market and increase in investor activity indicate that it is far more than a trend, but instead a new business sector.

Investors that align with the right partners are finding their REO-to-rental efforts successful and valuable for the industry as whole.

As with any REO property, accurate valuations are key for the REO-to-rental space. Broker price opinions should now be tailored to include not only comparables for that particular property, but also rental addendums and rent comparables within a given neighborhood. Properly conducted inspections are always crucial for rental properties, often due to the fact that rental homes are not traditionally as well cared for as owned homes. However, especially after recent snow storms across the country, it is more important than ever for investors to work with property management partners that can provide low cost, yet quality inspections—giving them peace of mind that an experienced professional is assessing any damage and evaluating a property’s current condition.

As a follow-up to valuation, investors are finding success by spending the time and money on repairs and repair analysis upfront, instead of after a renter is in the home. Working with real estate agents and contractors to improve the condition of their homes leads to fewer monthly repairs down the line. By working with property management partners to gain sound advice, investors are able to make wise decisions on how to best improve the property at the onset.

For players in the REO-to-rental space to continue fruitfully with this model, they must identify partners that deliver these valuation and repair services as well as a strong surveillance offering. Investors cannot handle the entire boots-on-the-ground effort required to correctly manage properties, service-level agreements and timelines completely in-house. Instead, many are wisely turning to management companies vetted by rating agencies to oversee their properties.

For many years local aggregators, mostly wealthy individuals, invested in real estate as long term rental properties. Now, this model has expanded to the institutional side and on a national basis; investors began with the nation’s top markets and are now entering tertiary markets, such as Charlotte, Portland and Indianapolis. There has been a learning curve associated with this business, but is has certainly carved itself a place in the market. The appetite for the bonds from the REO-to-rental securities is high. With the emergence of this new asset class, it is a sign of an exciting time.

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