The Dramatic Switch from Mortgage to Lease

Mortgage bankers, investment banks, hedge funds and asset managers — for everyone involved in the move from mortgage to lease on a preforeclosure or foreclosed property, the process is a dramatic switch.

I recently spoke with Alan Paylor, president and chief executive officer of REO Leasing Solutions, 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. The goal of the company, which is based in Houston, Tex., is to get the REO property leased out in 30 days.

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 a broker that understands that market and can get the property leased very quickly. "When the landlord-tenant relationship kicks in, the mortgage company has to step back and say, 'This is no longer a mortgage, I’m 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,” Mr. Paylor tells Managing REO.

When looking at prospective leasing companies, requests for proposals will be issued based on specific criteria, said Mr. Paylor. “Can you get it done, how do you do it, what is the price structure, are there options, can you manage HOAs, what are my lease options in states where I can do incentives for lease option to buy the property back? "Our broker network will literally say, 'We would like to sell this property to this existing borrower. What are all the incentives?’ Then we provide them legally to that investor,” he said.

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 windows, and fix the broken toilet, without calling up the lender late at night.

Instead of the asset manager letting the property sit vacant month after month, assuming 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 really good part of this is the normal rent money it would take to maintain a property now is a lot less,” describes Mr. Paylor.

“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.”