A Penny Saved, Not Wasted, Is A Penny Earned
I read an interesting article the other day that claimed advertisers are more effective in their pitch when they tell folks how not to waste money, as opposed to saying they will save you money. This idea resonates with the penny pincher in all of us; few things get me as amped up as when I realize I've just wasted a bunch of money. Clear Capital takes this message to heart by helping industry leaders reduce their waste with real estate-owned disposition strategy. It can be extremely easy to waste money by pricing an REO too low (albeit with good intentions) that is snatched up right away; or by pricing an REO so high it sits while the market tumbles around it. One-by-one, as neighborhoods make the transition from depreciating to appreciating home prices over the next couple of years, lenders need to pay particular attention to their strategies for REO list prices.Other than the lucky buyer, no one seems to enjoy an under priced REO. Clear Capital works with tens of thousands of real estate agents and appraisers, loan servicers, REO asset managers and investors that own portfolios of loans. We hear many perspectives on the frustration of under priced REOs. These groups have compelling reasons why under priced REOs really irk them — agents and brokers see the values of their listings in the neighborhood degrade even further, loan servicers appear to be uninformed, investors realize more losses, and the poor appraisers are again vilified when they "come in too low" by saying distressed comparables might actually be driving the market. It's personal to lots of different people. Reducing REO inventory pressure is important, but hindsight often reports that it was priced wrong and money was simply wasted.A solid list price strategy can help avert such waste. This strategy is necessary when determining an REO list price when working to get the REO off the books quickly and minimize losses, and come away looking like a Rhodes scholar.When it comes time to list the defaulted property, the REO asset manager has a file full of valuable property condition inspections: broker price opinions and appraisals received through the default process, some appraisal reviews, and a few reconciled values. From all of these reports, they usually have a pretty good idea what the property is worth … today. As the asset manager is painfully aware, the history of valuations on the subject property over the period of default most likely has dropped significantly; valuations are after all, "points in time." Valuations need to be interpreted with the context provided by the overall market conditions.There are two major factors to consider while pricing REO properties. First, what is the local market doing right now; and second, how are REOs behaving within that market (what are the REO days on market, the REO discount from performing sales, and the percentage of REO sales as compared to all sales)? The more geographically granular you can get this data the better. Knowing what's going on in the neighborhood is much more useful than knowing what’s going on in the metropolitan statistical area. That is the goal of Clear Capital's Home Data Index, which offers the most recent and granular market data available.Local Market Analysis: Market conditions need to be considered carefully. A year-over-year depreciation rate will not give you the view you need. You want to examine the trends over the last handful of quarters. If a market depreciates 30% in one year, it may have dropped 25% in the first six months, then only 5% in the most recent six months. This tells a very different story than if it had dropped 25% in the most recent quarter. You want to know where, within the year time frame, the lion's share of value depreciation occurred. When it comes time to sell the property, the trend can be more useful than the number. By simply forecasting the recent trend line forward in time (by the number of days shown in the REO days on market average), you get a pretty good idea of the price you want to list — ideally, just below where the market will be.REO Competition Analysis: The average REO days on market is key as you want your REO property's DOM to beat this number. If you list the REO too high, your subject property will be on the market longer than average. Then you'll have a nice stale listing that needs to be reduced in price to get noticed by borrowers and to be competitive in the inventory. When trying to sell a defaulted property where you are chasing the market down, your listing gets a double stigma. This is not a fun situation to be in.Clear Capital is the first major index to report that that nationwide property values have actually increased over the most recent quarter. However, be very careful since every geographic area is changing at a different rate and has differing REO dynamics. The goal is to price somewhere around where the local market will trend between now and the number of days into the future shown in the average REO days on market. Drastically cutting the current value to trend just below the average days on market may seem like a deep cut and a waste of money. However, pricing too high in a depreciating market means you will have to chase the market down, and ultimately accept a lower offer while also incurring the risk of holding the property. Everyone loses. In an appreciating market, you can position your REO to be attractive to an investor by pricing just below where the up-market will be in the average days on market. Savvy local investors will know and appreciate your strategy and both sides will benefit.Hindsight is friendly to those with data. When you can see the context of the market conditions on your existing valuations, the pricing strategy becomes a lot less risky. You'll find yourself looking back on your strategy and recognizing that the money you didn't "waste" was not measured in a few dollars, but in tens of thousands of dollars. And that’s a great feeling.