The increase in real estate owned (REO) properties on the market nationally, as well as the length of time these properties remain on the market, has been well documented.
The problem is expected to grow worse as adjustable-rate mortgage resets continue to hit the market. According to The Wall Street Journal, mortgage foreclosures are currently at 1.39%, up from 1.08% at the end of 2007 and 0.58% in 2006.
At the same time, the traditional real estate market has been hard hit in virtually every corner of the country as sales decline, home values decrease and financial institutions tighten their loan standards. The Wall Street Journal also reported recently that existing home sales fell from an annual rate of 6.11 million in March 2007 to 4.93 million in March 2008 – a decrease of more than 19%.
It is believed that REO properties now account for 10% to 20% of existing homes on the market. That means that in a flooded housing market, REO properties face stiffer competition from the traditional home market than from other REO properties.
Gone are the days when REO properties can be sold as-is or placed on the market with basic trash-out and maintenance services. Today, REO sellers must compete with – and therefore think like – traditional homeowners when placing properties on the market.
Clearly, there is a difference in what a seller can realistically invest to maximize the return on a $400,000 property in California or Florida, versus a $100,000 property in the Midwest. Sellers with high-value properties in their portfolios are increasingly investing upwards of $10,000 to $20,000 to make interior and exterior improvements that have the greatest potential to yield better returns and shorten the time an REO property remains on the market.
Even with lower-value properties, REO sellers can maximize the return with minimal investment. The key is to make the property as appealing as possible to a home buyer looking for a home to live in and raise a family in.
When making property disposition decisions, REO sellers must balance three significant cost factors: market value, repairs and improvement expenses, and carrying costs while properties remain in the seller's portfolio.
Historically, field servicers have focused primarily on property preservation, with a goal of protecting the asset from further physical decline by securing, maintaining and inspecting the property on a regular basis. However, in this highly competitive REO market, the field servicing industry must adapt its REO service offerings to effectively address all three cost factors relative to the property value and the return on investment the seller can realistically expect to achieve.
Market value
Many factors influence market value. Certainly, the glut in the housing market nationally affects property value, as do economic conditions, shifting populations, the attractiveness of a neighborhood or community, and the age and condition of the property.
With REO properties, another factor that affects value is the REO taint. When prospective buyers see an obvious REO property, they often mentally discount the value of the property, expecting to encounter a desperate seller and desperate property.
A desperate-looking property is more likely to attract an investor looking for a deal, compared to a buyer in the market for a home to live in. Prospective home buyers are looking for a home they can imagine themselves living in, and feeding that imagination is essential to increasing the perceived value of a property.
REO sellers are beginning to recognize what viewers of the popular HGTV television programs are learning – strategic improvements and maintenance can add significant value to REO properties by making the home appeal to the buyer's emotions and senses. Even in a slow market, plenty of buyers are in the market for homes.
Curb appeal is important in any market, but in a competitive market in particular, it stops prospective buyers from finding reasons to deduct value the minute they drive up to the property.
Real estate agents know that curb appeal is an essential first step in attracting a home buyer. No matter what a seller does on the inside of the property, if the outside doesn't draw the buyer in, the emotional connection is lost. The effect is even worse if the other homes on the street have nicely maintained yards.
This is why REO sellers are beginning to move beyond minimal grass cuts and yard clean-up. With higher-value properties, sellers are increasingly authorizing exterior painting and repairs, trimming of bushes and trees, mulching, weeding and other services to improve the curb appeal of the property.
But with lower-value properties as well, sellers need to maintain yards to the same standards as those of other homes in the neighborhood. These requirements mean weekly or bi-weekly grass cuts, weeding of planting beds, trimming of overgrown trees and shrubs, and removal of yard clutter.
Repair money
On the inside, even when REO properties can't justify the expense to make improvements, their appeal and value can be greatly enhanced with regular maid service, yet too few REO sellers recognize the importance.
Maid services to remove cobwebs, replace burned-out light bulbs, wash windows, clean floors and carpets, wipe down counters and other surfaces, and make sure bathrooms and kitchens are clean and fresh can add thousands of dollars to the value of any property, at minimal cost.
For higher-value properties, thorough cleaning and repairs, a fresh coat of paint, new carpet and flooring, and updated lighting and fixtures make an REO property more attractive to traditional home buyers intending to live in the home. Many buyers are willing to pay more money for a home that is move-in ready, and that will not require them to invest more time and money after they move in.
Of course, because even basic remodeling and repairs cost money, REO portfolio managers must carefully consider these expenses when making REO disposition decisions. The difficulty in making the choices is that the bid process for an individual property can be cumbersome and time-consuming, especially when managers are responsible for large portfolios across the country.
In this area, field servicers can help by identifying creative and innovative ways to streamline pricing and bidding processes so that portfolio managers can make the most efficient and effective decisions to maximize their return on investment.
One strategy is to offer a flat-fee pricing model. For example, if REO managers work with a flat-fee pricing model and know that painting will cost $1.50 per square foot based on floor space, that carpet removal and installation will cost $12 per square yard, and that vinyl flooring will cost $15 per square yard, they have enough information to make more informed decisions about property disposition, weighing the opportunity for increased return on investment and faster sale.
Partnerships
The ultimate goal of an REO manager is to move a property out of its portfolio as quickly as possible and at the highest return possible so the cash can be reinvested. The longer the property languishes, the more money is lost.
Therefore, to make REO properties as marketable as possible, it is essential that REO managers, their brokers and their field servicers work as a team. The broker's role on the team should be to help the REO manager determine the potential market value of the home and the appropriate level of investment that will result in the most efficient sale. Investing too much may mean that the property is priced out of the market, investing too little may make the property less competitive with traditional homes.
The job of the field servicer is to assure that the property is in the best condition possible, appropriate to the market.
What does that mean? In addition to the initial repairs and maintenance, the property interior should receive maid-style refreshing service on a regular basis – floors swept, bathrooms cleaned, surfaces dusted and stale odors eliminated. After all, these steps is what sellers do with traditional homes on the market to make them more appealing.
Outside, the lawn should be cut as regularly as the lawns of other properties on the street, and receive the same attention to other landscaping details as well.
Additionally, it is important for the broker and the field servicer to work together on behalf of their mutual customer to quality-check one another. If the field servicer is on site and discovers, for example, that the real estate sign is missing from the front yard, a call to alert the broker is in order.
At the same time, if the real estate broker is showing the house and notices that something needs to be repaired, a call to the field servicer can assure that the issue is addressed as quickly as possible.
In a competitive real estate market, REO properties can be as marketable as any traditional homes they compete with. What it takes is a spirit of cooperation, creative thinking and new approaches to add and retain value.
Robert Klein is CEO of Safeguard Properties Inc., a Brooklyn Heights, Ohio-based company specializing in property preservation, property and insurance-loss inspections, REO services, valuations, hazard claims, and title services. He can be contacted at (800) 852-8306.
