Conducting Repair Work to Stabilize Distressed Markets

With over two million vacant properties throughout the country available for a prospective buyer to purchase, it is important for financial institutions to distinguish their distressed homes from the competition in order to remove these assets from the market in an efficient amount of time.

According to Elizabeth Duke, a member of the board of governors of Federal Reserve System, over one million properties will pass in REO inventory in 2011, with another one million expected in 2012 and 2013, respectively. She added that the current inventory of existing homes for sale represents approximately nine months of sales compared to a normal rate of five to six months.

One idea that institutions can think about doing is investing money into their REO assets by conducting home improvements for these distressed properties.

Brian Hurley, president and COO of San Diego-based New Vista Management, said repairing REO properties helps provide a struggling neighborhood with a more attractive presentation.

“Improving REO homes can elevate and sustain property values and therefore benefit the surrounding neighborhoods,” Hurley said in a webinar hosted by the Federal Reserve Bank of San Francisco called “Real Estate Owned Disposition Risks.”

Over the last four quarters, New Vista has studied REO performance and disposition at the 21 hardest-hit communities and found that the final price differential between an owner-occupant property and a non-owner occupant home is 41%.

Another advantage Hurley said of doing repair work is that lenders can then expose their assets to a larger market.

“When properties have significant structural defects or repair challenges, they are really only accessible to investors who can fund the acquisition with cash. But when lenders actually fund the repair for these properties, they actually open up the marketplace and let owner-occupants acquire these properties as well,” Hurley added. “This obviously has some long-term benefits for communities and neighborhoods, but there's also an institutional performance impact as well.”

P.J. McCarthy, director of REO alternative disposition at Fannie Mae, which has repaired over 87,000 properties nationwide in 2010, also believes that upgrading a distressed property is beneficial for both the local community and a homebuyer.

“Generally, when you make repairs, you enhance the ability for a buyer to finance that property, increase the marketability for that property and see a return on the property for your investment,” McCarthy said in the webinar.

Arizona is the sixth worst state in foreclosure filings with 29,701 through September, RealtyTrac said. Eric Lichtenheld, president of Tucson, Ariz.-based real estate company Integra Group that specializes in REO listings, said Pima and Maricopa counties are both currently in a seller's market because the absorption rate in September was only six months, compared to approximately 10 months a year ago.

“We're actually seeing multiple offers that are going under contract relatively quickly,” Lichtenheld told Mortgage Servicing News. “If they do improvements to make the home FHA financeable, then they are typically recovering an investment because it is such a sellers market right now.”

Lichtenheld said his clients are typically investing $2,000 and $7,000 in repair work. He added that they usually receive a 100% return on their investment, depending upon the type of property that is up for sale.

Even minor improvements such as covering electrical outlets, capping wires, filling a pool or fixing fixtures will help an asset sell quicker because they will qualify as an owner-occupant property if these repairs are done, Lichtenheld said.

“We are telling our clients if you can make this home show that it is as good as the competing properties, it may cost you some money up front to make the improvements, but you will recover the money because of the current seller's market,” Lichtenheld told this publication. “Most importantly, even though the property will be off the market during the time it takes to do the rehabilitation, you will be able to recover it by having lower days on the market when it is up for purchase to buyers.”

In Pima County, owner-occupied quality homes were being sold three times more often than cash sales in October 2008. However, in July 2011, both were selling at the same pace (one-to-one).

“The fewer owner-occupant quality homes you have on the market, the longer it is going to take to stabilize neighborhoods,” Lichtenheld said. “If you don't have good quality homes available for the marketplace, then obviously the home recovery is going to be slow.”