Lenders As Landlords Consider Leasing Out Properties

Houston-Alan Paylor is president and chief executive officer of REO Leasing Solutions here, a new company that works with hedge funds holding distressed assets, acting as a facilitator in the process of keeping families in their homes, and getting cash flow to servicers, lenders and investors.

Mortgage bankers, investment banks, hedge funds and asset managers - for everyone involved in the switch from mortgage to lease on a REO or pre-REO, the change is severe, he says. "It's an absolute dynamic switch. Fannie, of course, started this process on a larger scale and I think it failed at it on Jan 13. to lease out their REO properties."

When the landlord-tenant relationship kicks in, the mortgage company has to step back and say, "'This is no longer a mortgage, I'm a landlord.' Most of them don't want that. They need someone to shepherd that piece. That's what a comprehensive firm will do. That's what we intend to bring to the equation," said Mr. Paylor.

If a lender, servicer or investor has a vacant property, they must go down to a local level and study everything from Craigslist to MLS, and form a relationship with broker that understands that market and can get the property leased very quickly

"The one component you have to consider in all this is the resident. The former mortgagor, the tenant that's going to be there, that is so critical in the equation of being able to manage that mortgagor to tenant and maybe tenant back to mortgagor again in a lease option with incentives. This requires a property management system mentality. You take off your mortgage servicing hat and put on your property management hat."

For example, companies have to evaluate REO Leasing Solutions under property management, he said.

"You have to have mortgage experience to understand how to take a loan in and out of that environment. The minute you put on that property management hat, that renter becomes a tenant. That means resident check, credit checks, criminal background checks, all those things have to be done immediately, to determine if that guy can live in that neighborhood and become a tenant."

Now, when anything happens to that property the renter-tenant is going to sit back and say, "I have a broken air conditioner, please fix it," describes Mr. Paylor. "You need to fix it very quickly. You have a dynamic that includes broken windows to some things that you never worried about before as a mortgage servicer. You have to worry about broken toilets 24 hours a day, 24-hour call centers, things that have to be done on that property to maintain the value. Do you want to pay for the gardener or will the guy garden it for you? These are small things but at the same time you have to be able to qualify the renter, you have to be able to provide maintenance options and access to maintenance options very quickly."

If the tenant has a lease option to buy the house, he has a strong incentive for keeping the house up, he will mow the lawn, take care of the property, fix the window, fix the broken toilet, without calling up the lender late at night.

Instead of the asset manager letting the real estate-owned property sit vacant month after month, thinking they are going to sell it, there is a way to have cash flow with an option to sell at any time, he says.

The company's goal is to get the property leased out in 30 days. "The really good part of this is the normal rent money it would take to maintain a property now is a lot less. You are going to be able to rent a property next door to somebody better, faster, quicker, cheaper, because you are not asking for $1,000. You're asking for $700."

The ability to lease is an excellent avenue for buyers of distressed assets to get a return on their investment. "They are buying anywhere from 20 to 40 cents on the dollar. They think they can still sell it, but when I run a model for them, two years from now they are getting 100% of their money. They're getting 300%, 400% ROI." he said.

Next in News ►