As-Is Condition? As If! Servicers Up Rehab Investments

Written by Caroline Reaves
on December 01, 2010 No Comments
Categories : Required Reading

REQUIRED READING: Servicers and investors appear more willing than ever to invest in rehab and repair activities prior to listing a real estate owned property (REO) on the market. While the concept is nothing new, it remains a hot topic intriguing the minds of the default-servicing masses. For well over a year now, terms such as ‘staging’ have been key buzzwords in the discussion for effective REO disposition strategies.

In reality, there has been an industry shift in what it means to successfully package REOs to make them more appealing to buyers and efficiently move these properties off servicers' books without incurring substantial losses. Servicers are not just compelled to take part in this type of approach to the marketing and liquidation of their REO assets. Rather, they are enlisting these methods out of necessity. Various rehabbing and staging tactics have become a matter of survival with regard to how they compete for buyers' attention.

These tactics seem to have not only earned popularity in the industry, but also sustained it. Although acceptance of this strategy has widely increased, some hesitation still remains. Why is there a continual need to educate the industry on whether these techniques are worth the time and investment involved? There is reasoning behind why rehab and repair strategies have gained such momentum.

Just how did this happen?

It is important to first address the underlying factors as to how the industry came to a point of needing change and opted for the alternative of no longer just leaving REOs in as-is condition. To begin, the ailing origination market is not news to anyone, with volume still below 2003 levels. Economists continue to see ebbs and flows in what may be signs of near recovery, but legislators and industry participants alike are still searching for ways to stimulate home buying and restore housing values.

Even with record-low interest rates hovering just above 4% and the availability of programs such as the now-expired first-time home-buyer tax credit, people have been slow to respond. With consumers possibly more cautious than ever about their spending habits, not to mention favoring cash in any transaction possible, those who are looking to purchase a home now find themselves considering bank-owned properties.

The availability of REOs has become mainstream knowledge for almost all consumers, particularly current home buyers. Although bank-owned homes have carried many negative – and oftentimes false – stigmas, their purchase appeal comes in the form of affordability. And now, everyone is looking for whatever deals are available. This is evidenced not by the levels of REO inventory that have remained at increasingly high levels for more than one year, but rather in the rise in REO sales.

Through the second quarter of 2009, there were fewer than 80,000 REO sales, according to RealtyTrac. That number jumped to nearly 120,000 in the next quarter and has remained fairly steady since. Added to that is the fact that the average sales price of a bank-owned home is consistently lower than that of nonforeclosed property. In fact, RealtyTrac reports that REOs sold at about 85% of the sale price of homes pre-foreclosure in 2008. That discount was even greater in 2009 and has reached an average of 72% thus far in 2010. People are looking for the best possible deals in this market.

Following the familiarity that consumers now have with REOs, entirely new expectations have emerged for purchasing these properties. Cheap homes are not sufficient anymore. Buyers already expect that. So not only do they anticipate the reduced cost, but now they look for homes that have been conditioned with move-in-ready cosmetic appeal, such as new carpeting and paint.

The surplus of REO inventory has presented a newer challenge of bank-owned homes competing with themselves. To create an edge over properties in as-is condition that may be available at a similar cost, servicers have looked at rehab techniques, as well as smaller repairs, as the remedy. A fresh coat of paint, furniture in the home – or even a single room – or newly planted flowers around the mailbox add that special touch that any homeowner desires and the perception that the house has been cared for in the past and is being cared for now.

With the marketability of REOs being improved by rehabbing and repairing, why has there been such hesitation from servicers to engage and then implement these various techniques as common practice? To start, there was a time – just two years ago – when REO volumes were low enough that servicers had little pressure to quickly liquidate those assets. Even when the first "flood" of REO occurred, there was the initial perception that the current market would not be a long-term problem. Many servicers believed the REO wave would be a shorter-lived issue, when, in fact, it continues today.

Servicers also felt there was an advantage to leaving properties in as-is condition, believing that the properties would move more quickly to sale and, therefore, would be able to recover the losses solely through briefer sale cycles. But that was a different time and a different market. With foreclosure activity still high, the industry is faced with anticipating future volumes. Servicers must now have a strategy in place to ensure the efficient disposition of their active REO portfolio.

Also, up-front costs continue to deter servicers from taking a rehab approach to their REO marketing and disposition strategies. There is an obvious concern that investment of time and various resources will not result in a positive return on investment. However, with larger volumes of properties competing for buyers' attention, rehab investments are a proven method of increasing value and sale price.

Servicers' hesitation remains on whether repairs, upgrades and other improvements can be completed timely enough to ensure that the property's time on the market is kept to a minimum. Properties that have not received rehabilitation work can incur considerably longer times on the market. While these properties are being marketed, servicers are responsible for not only maintaining their appeal, but also doing so in a manner that complies with local code. When added up over extended amounts of time, costs for biweekly landscaping services, pool services and ongoing maintenance can become substantial.

The sense-able approach

Servicers will be moving in the right direction if they just work toward appealing to the senses when it comes to REO marketing and disposition.

Creating a refined interior and exterior aesthetically gives a property its character. Although staging is great for defining interior spaces, it can be supplemented with cleaned or new carpeting and flooring. Not only are highly visible tactics – such as the appeal of ongoing yard maintenance, new landscaping and updated appliances-appealing, but so too are many intangible elements like the smell – or even sounds – of a home. Take, for instance, the aroma of a fresh coat of paint or the elimination of an old droning appliance.

REO is a viable source of homeownership for many individuals in the market today, and taking the proper steps to preserve those assets is a smart business decision for any company.

Caroline Reaves is CEO of Mortgage Contracting Services, a property preservation and inspection company. She can be reached at (813) 387-1100.

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