Minor Repairs Make A Dramatic Difference
Asset managers rely on feedback from REO agents and property preservation vendors as to whether or not it makes sense to add some fresh paint and carpet to real estate-owned assets. Lenders are spending a little bit of money on window dressings and more minor repairs compared to making major, expensive changes to these homes, said panelists on "The Ever-Changing World of REO" session at the MBA's National Mortgage Servicing Conference in San Diego.
In order to get buyers in the door and prevent a decrease in value due to appearance, a little bit of landscaping can make all the difference. In the summer, REO divisions promoote turf-staining the grass to provide instant curb appeal.
"Around 6% of the value of the expended portfolio is getting repaired, and mostly it's due to financing," said Thomas Driver, managing director of operations at Keystone Asset Management Inc. "Other than that, we want to sell it for the highest price in the shortest amount of days."
One of the most important things an asset management company can do when marketing a property is set the initial list price, Mr. Driver added. "We really rely on our agent broker network to make sure that they know their market. If they don't, we're losing money every 30, 60, 90 days of marketing time."
Staging properties is being used more often to move properties, especially on high-end homes. These days because of the high carrying costs, companies don't want to drop thousands of dollars to paint and carpet the "beat-up and old" REO properties. Some lenders are now choosing to paint just the front room of the home because there are so many first-time homebuyers that come in, and the front room is the first one they see.
"If you can fix that up for $800 or $900, it gives the buyers a visual stimulus to go through the rest of the house and see what it will look like when they come in and want to paint it their color. We've seen an increase in interest on these properties due to the condition on them. Just cutting back anywhere from $700 to $1,000 on the size of the house, I'm not going to do that on a $10,000 property. It's got to be specific," said Eric Mills, REO operations manager at Financial Asset Services Inc.
Some companies are seeing one advantage to the Protecting Tenants at Foreclosure Act. Under leasing programs, there is a positive execution of selling REO properties with tenants in them, perhaps because the property is lived in and shows better. And investors appreciate already having a paying tenant in the property, the speakers said.
Asset managers are employing national property preservation companies to help market and sell distressed assets while keeping the property looking good. A lot of new training programs are also being created with new REO agents to education them about lender expectations.
It's hard for an asset management company to set best practice standards, added Mr. Mills.
"There are ethical best practices, moral best practices. There are best practices in REO, which is different than short sales. It does take a different mentality with a short sale. There is a fine art with REO and knowing how to effectively liquidate an REO property for the lowest price and as quickly as possible. There is the same concept with the short sale. I'm not telling you what to do. You have a consumer in place that you have to work with," said Mr. Mills.
"The ones who have been in the industry for many years are used to dealing with the occupants and selling their primary residence. That's coming back into place. A lot of people who jumped in the industry the last few years who know REO, it's a different world when it comes to short sales. Please if you are looking to get into the short sale world, I would suggest you take a couple of classes."
Mr. Mills has worked back and forth on the origination and servicing sides of the business for the past 20 years.
"A lot of people that came from the mortgage world and origination got into the real estate market. They are planning for it to come back sometime in 2012. They are more of a mass-number strategy. I suggest going to the training that asset managers have. Be mentored instead of trying to bust out of the market yourself."
Many agents spend a lot of time these days also trying to understand the foreclosure and legal process. Knowing the different state foreclosure laws will also help in the disposition of foreclosures and REO assets.
The longer these assets remain on the balance sheet, the higher the carrying costs. When listing properties, look at the net proceeds that will be received at the time of sale compared to the appraisal and BPO. Analytics must be used when determining a short sale and considering carrying costs. For bulk sale offerings, look at the carrying cost expense in addition to the marketing haircut from the value compared to the offer on the bulk acquisition.