Improving Each Property's Appearance Inside And Out
Lenders and servicers cannot effectively move REO assets off their books if they do not first eliminate the traditionally negative stigma associated with these properties.
According to Chad Mosley, vice president of operations at Mortgage Contracting Services, they have a fiduciary duty to their investors to liquidate each asset while minimizing holding time and carrying costs.
"The servicer has to balance and justify the additional expense to neutralize the property so as to not be judged as having thrown good money after bad by their investor," Mosley told Managing REO.
Once each property reverts to the REO department, in many cases they have been neglected, abandoned and not maintained for months, the lender and servicer have a short timeframe and limited funds to help eliminate the stigma so that the REO can compete with other properties on the market.
"To homebuyers, if the property has not been thoroughly cleaned, it is hard for a family to see themselves living there," added Todd Luckey, AVP of operations at MCS, a property preservation company based in Tampa, Fla. Both Mosley and Luckey work in the company's Dallas office.
"It's very easy to pick out properties that are bank owned vs. for sale by an individual homeowner. Through the default and delinquency process, which is sometimes, 30, 60, or in some states 180 days, a lot of the upkeep and general maintenance is overlooked or cannot be afforded by the borrowers," said Mosley.
There are several things that lenders and servicers can do to bridge the gap without sinking a whole lot of money into the property, both men stressed.
These cost-effective steps are geared to make the "REO not look like an REO."
This starts with curb appeal the minute a prospective buyer pulls up to the property. It might include landscaping and working on flowerbeds.
"It means having a clean exterior free of debris. Shrubs and trees are trimmed and the yard is maintained," added Mosley.
"Also, having the front door look appealing is important. Paint or replace the front door. This is a main focal point and one of the big things buyers consider when purchasing the home."
Spend time on the interior of the REO asset, taking the extra time, effort and expense to do a thorough cleaning of the home. Often, these properties are simply broom-swept and made free of trash. "Pay attention to detail," he said.
The REO is likely to be located on the same street as "the random family" who has been planning to sell their home for two or three months. They have maintained the property during this period and there has been no deterioration.
"In terms of values, the REO market is competing with other values in other segments. The properties listed by individuals are typically sold higher. There is also a huge wave of short sales that is going on right now," stressed Luckey.
Also, both said there is a perception by many homebuyers that all REO properties can be purchased at a sizeable discount. Buyers may assume the property has been neglected and associate the foreclosure sale as further indication that something is inherently wrong with the property itself.
It's no surprise that the states remodeling homes the most are the ones with the highest concentration of REO properties: Nevada, Texas, Arizona, California and Florida, as well as Illinois and Georgia.
Field Asset Servicers, a property service company based in Austin, Texas, recently conducted an independent study of foreclosed properties comparing the number of days on market for remodeled properties vs. those that were not remodeled. The results showed a dramatic 54.6% reduction of days on market for homes that underwent rehabilitation.
Out of the 8,200 properties tracked across 13 states, the average DOM for a property without rehabilitation was 154.4 days compared to just 70.4 days for the properties that were rehabilitated.
To help lenders more cost effectively rehab their foreclosed properties and take advantage of this return on investment opportunity, FAS created the "REoMODELING" solution. From exterior renovation to interior improvements, FAS will qualify and quantify the potential for the rehab project.The company uses a national network of 13,000 contractors along with a field quality control team.
"Now, the houses are beginning to look alike and there are so many of them. The buyers, who might be investors, have to make choices," said Greg Tolander, COO for Field Asset Services.
Rehabilitation of the home, he says, is becoming a more powerful tool for the REO brokers and to the mortgagors to have in their arsenal to help sell the house. "It becomes not just the house with curb appeal but the nicest home on the block," he said.
As the REO inventory continues to grow, lien holders are doing whatever they can to be more competitive in the arena. The market was made of home occupants in prior years followed by investors, back to people who are going to live in the home.
"What we saw before, it was 'fix the handrail, fix the plumbing, fix what is there' because we're going to have to any way because of home inspections rather than appeal. That appeal is becoming more and more important today. It's gone beyond minor repairs. The investors who buy the homes are going to add the appeal to flip the house or hold it. An occupant wants to do more."
The REO market is also seeing the re-emergence of the 203(k) loan. The owner occupant can finance the cost of repairs. "These buyers can take advantage of that. It's good for them, and it's good for the economy," he said.