Rehabs Are Key to Maintaining Value

As values drop for vacant REO properties, mortgage companies are being hurt as much as the next-door neighbors. Awareness is growing to make sure these homes compare with the neighborhoods around them. House with foreclosure sign. Shelley Kaye, president of REOMAC, which is based in Sacramento, Calif., says managers are going in to properties and doing a lot with paint and carpet to preserve these assets.

“We recognize too that the first-time homebuyer just doesn’t have the resources to fix it up and purchase it. Lenders can fix it and get better value for the property. The buyer is able to purchase the property on a good loan with no money out of pocket. They can just move in.” Mortgage companies are using trained REO agents who are familiar with local markets to do the job well. “The bank will call agents and give them listings. Being an agent is very hard work. The lenders are getting smarter, realizing we don’t want to bring the neighborhoods down.”

Lenders are scrutinizing properties, making repairs in areas where it is a logical move. “You want the property to look like a typical home for sale. If we fix them up, we can sell them to the end user.” Robert Klein, the founder and CEO of Safeguard Properties, a privately held field service company in Cleveland, Ohio, believes lenders today are focused on doing a better job on the basics to maintain a property. At the time it first secures a vacant REO, Safeguard uses its “Good Neighbor” door hanger contact procedure to leave door hangers at neighboring properties with an 800 number to contact the company 24/7 if they notice any questionable activity or maintenance issues that need attention.

This approach, which comes at no cost to clients, has received enthusiastic endorsement from code enforcement and city officials. “It’s very positive when you make contact,” said Mr. Klein. “The neighbor knows someone is paying attention to the home, to this vacant property. They know it is being maintained on a regular basis. It’s not just in limbo and no one is paying attention to it.”

The industry spent well over $1 billion last year to secure and maintain the safety and health issues of these homes, according to Mr. Klein. “I think we have a great responsibility. Vacant properties impact me and where I live. As an agency, I think it’s something we should be doing. We can’t solve the entire housing problem, but in our little world, we do what we can. We make the best out of a bad situation.”

The correlation between vacant properties and criminal activity is also well documented in communities nationwide, he said. “As foreclosures and vacancies mount, we have seen a material increase in the number of copper pipe thefts, arsons and related crimes at these vacant properties. This ripple effect drastically reduces the servicer’s collateral in their assets and wreaks havoc on the communities where the properties exist.”

During extensive communication with code enforcement officials around the country, Safeguard found that it is common practice that all complaints regardless of type (tall grass, theft, vandalism, etc.) must be acted on appropriately to resolution. Typically, the city will issue a citation, complete the required maintenance, declare the property a nuisance and/or place the property on the local fast track for demolition.

“We’ve been in touch with code enforcement officials for the past five years,” he says. “The biggest concern is that they can’t handle the calls coming in from the neighbors to respond to these complaints. It puts the burden on the city to send someone out.”

A lot of times the neighbor does not know who to contact at the lender or servicer when they have an issue with a property. With this door hanger initiative, it takes the burden off of the city officials to get to these complaints, he said.

Vacant blights are a national issue. Mr. Klein says neighbors are the best eyes and ears to detect problems. Sometimes after a company like Safeguard does an inspection of a vacant REO, the day after the company leaves, something terrible can happen. “These programs add more security to the property to make sure it is better maintained.”

Safeguard also offers a maid service program. After the mortgage company has taken title and the property is vacant, Safeguard goes out and cleans the property and removes the cobwebs.“You have no idea what we find in some of these properties. We will wash the counters down, clean the fridge, put in air fresheners so it doesn’t smell like an REO,” said Mr. Klein.

“The lender wants to sell it as soon as possible to a homeowner who will live in the property. You want to make it as attractive as possible. But also sometimes it doesn’t make sense to make repairs. You have to make it look and smell good. We try to do the best we can. We do as much as we can so the neighbors don’t have a rundown home with 50 tires in the front yard.” Properties are becoming more seriously damaged, he added. Some homeowners in foreclosure are so frustrated they will do serious damage to the property. They take out appliances, put holes in the walls and holes in the floor. “There is no rhyme or reason. They are taking their frustration out on the system or the process. We are seeing that more and more.”

“The goal of the mortgage company is to sell it as quickly as possible. Every day they hold on to it is costing them money, in addition to the foreclosure process. It’s a bigger financial loss. We want to make the house as inviting and attractive to the possible homeowner. This depends on the value of the property and how much the lender can get. The things you do to a $500,000 home are different than a home that is $30,000.”

Even for a home that is around $250,000, lenders are doing more for repairs. The objective is to get the highest return because the lender has already lost money. “It’s worth it to put in $10,000 to a home if you can get additional value on the home,” he said.

Years ago, REOs competed against other REO properties, Mr. Klein recalled. “In today’s environment that is no longer the case. REO are competing with the homeowner trying to sell their property. You have to compete. If the neighbor has a nice front lawn with grass trim, you have to do the same thing. It’s a business decision.”

The bottom line is that vacant properties should conform to the rest of the neighborhood. In addressing the blight issue, it will take different means for different areas of the county. “The sheer volume of properties that we are seeing is pretty taxing You don’t want the property to stick out as a foreclosure or REO property. You want to keep it on the market at the highest possible value by maintaining it,” said Mr. Klein