The nation has been plagued by the housing crisis for several years. It is hard to go a day without noticing the blight it has left on our communities and neighborhoods. Houses that once were the spotlight of a neighborhood are now left to decay, and vandalism is leaving its mark on the ever-growing number of real estate owned (REO) and foreclosed properties that are being left vacant.
To help stabilize the housing market and help struggling homeowners get relief and avoid foreclosure, the government has introduced several programs over the past two years, including the Making Home Affordable (MHA) program, the Home Affordable Modification Program (HAMP) and, more recently, the Home Affordable Foreclosure Alternatives (HAFA) program.Â
HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under HAMP. In December 2010, the government issued Supplemental Directive 10-18 that included a number of changes to the HAFA program, covering key issues such as monthly gross income verification, vacant property requirements, release of subordinate liens, timing for issuance of short sale agreements, timing for response to an alternative request for approval of short sales, real estate brokerage commissions, alternative DIL programs and borrower notice timelines.
For the purpose of this article, I'd like to highlight the alternative DIL program policy changes. The supplemental directive states the following:
‘DIL agreements between servicers and borrowers that provide an option for the borrower to continue to occupy the property on a rental basis (deed-for-lease) or provide an opportunity for the borrower to repurchase the property at some future time are also eligible for financial incentives under HAFA, so long as all other program requirements are met. At the discretion of the servicer in accordance with investor guidelines, the borrower relocation incentive may be paid either upon the successful closing of the DIL or at a future time when the borrower vacates or repurchases the property.’
While there are certainly many things to consider when engaging in DIL agreements, these recent policy changes are welcome news to an industry under pressure to manage the multitude of foreclosed and REO properties on the market, many of which are vacant.
Could this lead to a greater acceptance and implementation of DIL agreements on a national level? And, could this help drive other strategies, such as lease-and-hold?
The scourge of vacant properties
According to a recent report from Econohomes, the homeowner vacancy rate stands at 2.7% – 80% above the historical average. The release of properties from the shadow inventory into a market that already has an overabundance of vacant properties and depressed housing values is inevitably going to have a negative impact on our communities and the national economy.
Vacant properties offer no upside. If we continue to evict owner-occupants and not replace them with paying residents, more properties will become vulnerable to crime, vandalism and arson. Abandoned properties, especially when massed in a single geographical area, leave a financial burden on local municipalities that have to provide resources to protect against health and safety issues. In addition, these homes quickly lose value and depress the worth of nearby properties, leaving a neighborhood less attractive to potential buyers.
Now, combine these soft costs with the hard costs of managing vacant REO and foreclosed assets. For a lender, the carrying costs associated with a $100,000 REO property (maintenance, insurance, etc.) can easily average $500 per month, and higher-priced homes have higher carrying costs. If you add in administrative overhead for the lender, costs averaging $1,000 a month are not unrealistic.
So why do we continue to evict owner-occupants?Â
Viable and healthy alternatives to evicting owner-occupants include offering current owners the option to remain in their home through a DIL agreement or to fill vacant REO and foreclosed properties with eligible renters. Occupied houses will help stabilize neighborhoods and increase the likelihood of being able to sell more units in an area with higher foreclosures. Houses that have residents tend to be kept up better while, at the same time, saving taxpayers the cost of local municipalities' having to provide additional police and fire services.
Pursuing a DIL agreement or finding new residents can offer both short- and long-term economic benefits for banks and lenders. In the short term, banks gain a steady stream of income for monthly payments and benefit from having residents who can provide daily upkeep to the property. In the long term, banks will realize the benefit of being able to sell a well-maintained – and, in some cases, higher-value – property in an attractive community.
There is also another trend afoot. Indications are strong that investor activity has increased since the beginning of the year. The National Association of Realtors reports that a record 35% of all residential sales in March were all-cash sales, indicating that investors are aggressively entering the market. In a classic case of taking maximum advantage of changing market conditions, many investors consider an REO property to be money just waiting to happen.
While the current market conditions and industry forecasts all point toward a favorable move to DIL and lease-and-hold strategies, there are still some hurdles that will have to be overcome. There are a few tips to ensuring a successful experience.
First, do your homework and research the neighborhoods where the assets are located to make sure they are ripe for rental potential. Specifically, look at the vacancy rates of certain areas to reduce competition.
Understand local landlord-tenant laws, including what services are required to be furnished by the landlord and if the service requirements are cost-prohibitive to ensuring a good return on investment.
Also, investigate state and local landlord-tenant laws as they relate to tenant rights to repairs. If an area is ‘renter friendly,’ you may want to reconsider due to the increased carrying costs, risk and visibility of holding assets in these markets.
Furthermore, invest some additional funds up front to rehabilitate and bring the property up to code. Rehabbing and upgrading a property allows you to command higher rents.
Granted, DIL and lease-and-hold strategies are not going to change the current housing crisis by themselves, but we cannot argue with a few simple facts.
A resident who is happy is more likely to take care of the property, leading to greater resale potential. Plus, a happy resident is more apt to make timely payments, providing banks, lenders and investors with cashflow. Finally, and most importantly, a happy renter has greater potential to be the ultimate buyer, turning the REO property into a profit.
Denia Graham is chief operating officer of TenantAccess, an Austin, Texas-based provider of REO asset management services. She can be reached at (800) 785-9617.