REO Disposition Study

(This article is the first in a series.) Today, servicers are working feverishly to help America recover, doing their part to assist troubled homeowners work out mortgage solutions while also maintaining and marketing existing inventories of foreclosed properties. With shadow inventory lurking over already swollen portfolios, the sense of urgency to move these properties quickly is gaining momentum.

It can be difficult to understand what drives buyers to make a purchasing decision, and what makes the properties that are actually selling so attractive. Not to mention, there is now added pressure from real estate-owned assets that must also compete with new construction and other homes for sale. How are servicers overcoming the traditional negative stigmas placed around REOs to compete in the marketplace? Is it realistic for asset managers to expect that their portfolios can effectively compete with, nonbank-owned homes? The verdict is still out. The executive team at Mortgage Contracting Services, a national field preservation company, began to ask what factors would help its clients move this mountain. In order to give them a better idea of the situation and hopefully substantiate a few of their ideas, members of the executive team hired a local Re/Max real estate agent, Mike Keeling, to show them both REO and conventional properties for sale in the area.

They hope to track these properties over the next several months to identify trends in REO disposition and sale strategies. The industry cannot move forward—at least not productively—without some idea how these properties compare and what tactics are most worth the investment to shorten the marketing life of these homes.

This is the second consecutive year MCS has conducted such an experiment. The idea behind the study was generated through MCS’ Property Audit Program where MCS executives and staff members visit properties to assess the overall condition of the property as well as MCS’ maintenance vendors’ quality of work.

The study takes the property audits a step further and focuses on a set of variables over time instead of at a single point in time. A great deal can be learned from these focused studies. For instance, this year there have been higher priced properties on the market in the study area. Brokers and listing agents are leveraging gimmicks to inform buyers that REOs are in fact an acceptable option when purchasing a home. One Las Vegas broker has initiated jet tours for airborne stints of luxury homes in foreclosure. Others—on a more realistic but still odd scale—even provide bus and boat treks to explore these properties. How have we come to this? While showcasing the availability of these assets to potential homebuyers is important, so, too, is maintaining their curb appeal and their interiors compared to that of other homes.

With that in mind, the goal of the MCS study is to accurately understand how REOs commonly measure up against other homes for sale, and to also know what techniques could potentially decrease an asset’s selling time and/or improve the home’s sale price. The company has identified a targeted, even-numbered sample of properties for sale in various communities surrounding the Dallas are. To track any relevant trends in successful sales strategies, several variables will be taken into account and measured over the course of several months.

As one component, REO properties are going to be gauged against conventional (or nonbank owned) properties for sale. REO inventory overall may oftentimes carry a lower listing price, which initially can be attractive to potential buyers. However, servicers must remember that these possible homeowners also consider the investment that must be put into the home after sale for repairs and updating, if needed, and then weigh it against other properties of interest. Another variable taken into consideration will be whether each property is occupied or vacant. There still remains much dispute on the pros and cons of maintaining each. Is it occupancy or vacancy that exhausts the most time and resources from servicers and their field service providers? Vacant properties, while empty, can emerge as traps for negligence and vandalism if not properly maintained, translating into code violations, costly repairs and safety concerns.

In addition to the occupant status and owner of these properties, the MCS team is curious about uncovering successes in different sales and bank disposition strategies. What is being done to entice buyers these days and result in a sale? Staging has become particularly well known in the industry, and it is being used to help market and improve the presentation of many REOs. The logic behind staging is that in better defining interior spaces with furniture and décor, as well as creating a more refined exterior aesthetic, a property is given true character that will resonate with potential buyers.

MCS hopes to discover if there is value in having a fully furnished home as opposed to one that is barren. They will assess the importance of extremely visible tactics such as the appeal of consistent yard work, fresh landscaping, new paint and carpet as well as some intangible subtleties like the aroma and sounds of properties.

Taking into account all these approaches and various combinations of them, MCS will monitor these properties to observe price fluctuations and variances in the list price versus a selling price. Also, each property’s time on the market will be noted. While this small-scale study only looked at properties in one segment of the country, the end results should be applicable elsewhere and provide a guide on how to best market prepare and move a property to sale. MCS plans to continue to assess the results from this study in conjunction with researching variables in other niches in the near future including the condominium market of Tampa, Fla. Caroline Reaves is CEO of Mortgage Contracting Services.