Rehabilitating Properties for FHA Loans: Know Your Buyer, Know Your Product
Due to the recent resurgence of FHA loans, companies that manage and sell REO properties are facing the challenge of getting REO homes in FHA condition, since seller delays are often due to property repairs. According to Chad Neel, president and chief operating officer of the LPS Asset Management and Field Services divisions, accurately assessing the property upfront is key for mitigating delays.
“The percentage of loans that go to FHA today compared to a few years ago is tremendous,” said Mr. Neel. “You need to determine if the property’s likely buyer will go through FHA for financing. Sometimes you get a property that investors will buy and fix it themselves or get someone who wants to rent it. Your FHA buyer is typically your first-time homebuyer. You need to assess that upfront.” LPS Asset Management and Field Services are Jacksonville, Fla.-based parts of Lender Processing Services Default Solutions, which provides integrated technology and services to the mortgage industry. Mr. Neel, who joined the company in 2006, is responsible for driving the divisions’ strategies and increasing the value of services for clients. Prior to joining LPS, Mr. Neel was president and CEO of mortgage origination software company IMX Inc.
In Mr. Neel’s experience, LPS is finding that when the property fits the profile, the company doesn’t need to spend a great deal of time or money to get the property in good, compliant condition. In fact, the most predominant things that need to be done are replacing appliances, replacing drywall and fixing light fixtures. “When you get that work done, you’re selling to prospective FHA buyers and there are no delays,” he said.
So, determining the need for whether an REO property would better benefit from a speedy rehabilitation or a more time-intensive process is predicated on that upfront assessment being as accurate as possible. “If it needs extensive repairs, you’re going to sell it ‘as is’ because it can be a sinkhole for repairs. Your initial upfront assessment is important. You often find the FHA-compliant properties are ones that don’t need major repairs.”
In terms of getting that first assessment as accurate as possible, Mr. Neel says that relying on the expertise of the broker and staff is also crucial. “You need to rely on your broker’s expertise. We service multiple clients so we work with a ‘best practice recommendation.’ When you’re identifying these properties and doing very simple repairs, it’s fast and easy.”
Another challenge companies managing REO properties may face is lenders that offer FHA and Fannie Mae financing may not know the guidelines to the repairs of the homes. However, Mr. Neel said that due to relying on the expert assessment of multiple sources, LPS hasn’t faced this problem.
“There are variances in people’s expertise. I wouldn’t generalize it and say one loan officer is better than the other, but that’s why we work with our expertise,” he said. “It’s up to seller experience. I wouldn’t say that this is a major problem.”
According to Mr. Neel, if this first step is botched, it can create serious problems for an REO company in the future.
“The expertise in where the initial step is the most critical. If your initial assessment is wrong, it can be a daunting process. You can run into more problems down the road if you don’t make your initial assessment correctly.”