BLOG VIEW: In today’s market, investors are seeking progressive liquidation strategies for their REO assets to ensure they get the best possible return on each investment. Renting properties has become a somewhat viable alternative, but a newer philosophy is emerging that is congruent with the influx of traditional fix and flips we are seeing in today’s real estate market.
Selling assets has once again become a popular path, but this time it comes with an expectation to do “big” repairs in order to substantially increase the market value. As this investor approach continues to grow, it will provide a lucrative opportunity for servicers who can quickly adopt a strong repair strategy, network and process.
Traditionally, distressed properties, including REOs, are often marketed in “as-is” condition or nearly “as-is,” which has limited the buyer pool. In an effort to recover their expenses, more and more investors are choosing to rehabilitate or restore these properties and present them in a “marketable” condition to a wider selection of potential buyers. To be clear, this new strategy encompasses much more than routine maintenance, basic property upkeep and simple repairs, but rather is a major remodel, often a complete overhaul of the entire property to meet new buyer expectations.
A recent study by independent research firm Ebiquity reported the vast majority, or 93%, of default servicing professionals are currently investing in REO rehabilitation. Additionally, 62% of respondents reported “significant” levels of spending, and 82% ranked “investment in property improvement” as one of the top three most effective ways to attract consumers to the REO market.
Market research indicates today’s buyers are seeking move-in ready homes with updated features, further driving the demand for the rehab and repair of REO properties. Servicers are faced with the challenge of meeting this growing demand while also determining how to best manage the many complexities associated with REO properties. They must now develop and deliver rehabilitation strategies that maximize ROI for investors and do so in a timely manner.
Renovation or rehab projects can be as small as new paint, updated fixtures and carpet, to extensive renovations involving roof, drywall and flooring replacement to bathroom updates, etc. To be successful in this market, servicers must first determine a relationship between comparable listing attributes and sales price to discover which repairs will yield the most value.
For example, if a local market report shows that houses with renovated kitchens and baths sell for 15% more than comps without these upgrades, a wise servicer will assess the cost required to make similar changes to their property. This process includes everything from providing the scope of work and managing the bid process to determining the best repair strategy to maximize return.
Investors are increasingly requesting that servicers develop rehab and repair strategies to maximize ROI. As a result, servicers are seeing the need to standardize the bidding process and eliminate any confusion among asset managers, accounting departments and compliance teams. Managing just one extensive remodel project can become a tedious and cumbersome process for the servicer. However, in today’s market, many servicers will need to manage multiple large-scale projects that span various states, adding an entirely different level of complexity to the task.
There are several technology applications available today that aim to help servicers manage the construction process. However, servicers need to closely examine these tools and ensure they provide the ability to not only track the construction process, but also allow the user to automatically analyze the viability of different scenarios.
To be effective, these applications should be able to track construction management fields directly from within an existing REO system while providing the ability to create reports and track activities including all estimates of repairs needed. A majority of repair projects will require servicers to examine and compare interior comp photos to determine the practicality of the suggested rehab strategy. The key to success, once the construction actually begins, is ensuring the project stays on budget and is completed on time. These two elements can often be difficult to manage, but a comprehensive construction management tool will ensure this important part of the process is properly managed.
As the real estate market continues to change, resilient servicers will be ready to pivot as new opportunities arise. Luckily, there are solutions available to help navigate new strategies by streamlining and automating the process and ensuring all possible outcomes are examined before choosing a course of action. Successful servicers will choose to embrace operational flexibility and adapt processes and offerings to meet the needs of new investors.
Rob Pajon is senior vice president of marketing and product for RES.NET.