What Terranova Is Doing Right With REO Dispositions
A solid blend of expansive data gathering, in-house expertise and multifaceted analytics that help assess local market values within the overall market context are key to generating the best business decisions.
That is a summary of the philosophy behind The Terranova Group model of foreclosed property dispositions. It is designed to manage REOs and sell them, too. Plus, the firm, which specializes in disposition strategies, would accept compensation only after a property moves out of the lender’s book.
The Terranova model was market tested, successfully crossing the theory-to-practice gap. Over the past 12 months the firm managed over 650 residential properties with an average value of $250,000, closed on over 400 properties and sold over $100 million in residential assets.
The firm’s contract-price-to-book value is about 99%, while the contract-price-to-market value is 98%, in part due to the fact that it takes an average of 90 days for up to 85% of the portfolios managed to be either under contact or sold.
The group’s CEO Robert A. Haney told this publication the key to Terranova’s success story is its process.
It has allowed the firm to bring down to 41 days the average period between when a property is put under contract to the actual closing time. “So we have very little fallout.” Plus the average processing time from the moment it gets an assignment to closing is about 100 days—which would count for only 15% of all managed portfolios.
Each property comes with its own unique challenge and with it comes a unique disposition strategy, he says, so REO managers need to have tools that make the aforementioned metrics possible. The Terranova approach combines expertise in real estate development, construction, and real estate brokerage with an end-to-end software solution that simultaneously analyzes every aspect of the process, determines asset values and the strategy that enables the bank to sell the asset at the highest price.
Often the first step taken by asset managers trying to dispose of a bank owned property is listing. While that step is “vitally important,” Haney says, it is as important to incorporate “a lot of analysis” to determine values faster. “Every asset has its own mystery,” he adds, so after determining an asset’s unique challenges, REO managers need to respond proactively to every potential pitfall.
Roadblocks may include title and owner’s association issues, the condition of the property, and market trends that indicate “the direction that unique market is headed,” all of which play a role in customizing a distinctive strategy for that property before it is listed for sale. It means planning simultaneous activities, Haney says.
For example, construction operations that help stabilize, or if necessary, improve the physical condition of the property may be under way at the same time managers are dealing with the actual listing of the property. Listings are executed “in a very disciplined fashion.” Real estate agents on the ground provide weekly if not daily communication to feed prompt responses on negotiating offers, signing contracts, viewing final documents. Finally REO managers ensure HUD and other settlement management requirements are met.
“There’s a lot of pieces to this puzzle,” Haney said. “You need to know what information to seek out and than know how to apply it to maximize value.” And in his view expertise comes first. Second is determining value and than selling a property at “the highest possible value” in the quickest amount of time. To ensure that in a declining market, he argues sometimes “dollars have to be invested in assets not only to enhance it to attract new buyers,” but also to preserve current values or very little investment “to stabilize the asset” and sell it “as is.”
However, data, analytics and expertise need a technology platform that helps provides individual property or REO portfolio data reporting in real time. “Technology is the glue that holds the whole process together,” Haney says, given that banks have slightly unique internal requirements on their growing REO portfolios and need to report to regulators. Unless data reporting and technology offer real time reporting, the information “has limited value,” he says. Clients need “simultaneous execution and communication” every step of the way.
Currently, Terranova offers disposition services in 33 states including areas with high concentrations of REO properties for sale such as Arizona, California, Florida and Georgia. As to Nevada, the country’s “hot spot for REO,” he says, transactions are limited simply because they do not happen to be part of the firm’s client base.
Beyond minor percentage point differences, results are similar despite state characteristics. “We do not have states in which we hit a homerun and states we were barely able to sell the property,” he said. For example, “if you compare and contrast” among the top 20 foreclosure states, results are similar in California, Arizona, Florida, Oregon, Texas, New York and Maryland, he says, even though they have different levels of REO problems.
Haney says Terranova’s approach is different because it is not a mortgage serivcer adapting to a drastically changed servicing marketplace, but as developer.
He recalls how in late 2007, as the early stages of slow down in residential property development became visible, the firm decided to leverage its know how as a developer in more attractive markets. In a few months a partnership with a national bank, allowed the firm to refine its technology platform and reporting capabilities, he says, and contributed to the creation of a national network of realtors, whose contribution “is equally important in managing REOs.” Terranova offers commissions as an incentive so they make REOs “their number one priority listing.”