Nonprofit Groups See Increase In Donated REO Properties

Written by Jerry DeMuth
on May 30, 2012 1 Comment
Categories : Required Reading

11655_reo Nonprofit Groups See Increase In Donated REO Properties REQUIRED READING: Call it the ultimate act of charity – nonprofit housing groups are receiving an increased volume of real estate owned (REO) properties, either at steeply discounted prices or as giveaways from servicers.

‘We've been getting properties from banks since 2002,’ says Charles Konkus, president of West Dundee, Ill.-based Real Estate Donations. ‘But there's been a rapid increase since the housing crisis began in 2007 and 2008, and that's because they have too much in their inventories now.’

Wells Fargo Home Mortgage offered 1,246 donated REO properties and about 700 discounted sales to nonprofits in 2011, according to Tyler Smith, vice president. In 2010, by comparison, Wells Fargo made 295 REO property donations and about 1,500 discounted sales.

‘Our goal this year is to do 2,000 donations and 1,000 discounted sales,’ says Smith. ‘A lot of that depends on the REO inflow. We don't really control the properties that we're getting and the condition and value that they're in.’

Citigroup's donations and discounted sales to nonprofits have been ‘steadily increasing’ over the past three years, according to Natalie Abatemarco, managing director of Citi's Office of Homeownership Preservation. Last year, the bank donated 205 properties and sold 19 properties at a discount to nonprofits.

‘I really think the trend will go up, because there is now really increased capacity for more donations,’ she says. ‘They've worked out the kinks on this. In many cases, the real reason the number of properties we have been donating has been increasing is that the nonprofits themselves have really developed their internal capacity to understand the system and really hone in on the properties they're interested in and now know to acquire them. As they increase their capacity, we're able to donate or sell at a discount more and more homes.’

Citigroup, like Wells Fargo, works directly with a number of local nonprofit housing groups, providing them with donations and discounted sales of REO homes in the neighborhoods they serve. Citigroup also works with the National Community Stabilization Trust (NCST), which sends weekly listings of REO properties it has obtained from servicers to approximately 300 nonprofits that meet the NCST's standards for experience and financial stability. Those lists, according to NCST Chief Operating Officer Danny Gardner, are broken down on its technology platform so that each nonprofit can view only the properties in its community and then, by clicking on each property, obtain the characteristics of each listing.

Giving it away

How do servicers determine which REO properties should be given to nonprofits? According to Smith, Wells Fargo makes its valuation determination in less than 30 days of getting an REO.

‘That's when we really know if we have a property that likely should be donated versus listed for sale,’ he says. ‘The goal of the donation team is to find them [potential donations] as soon as possible to minimize holding costs. [This] scrubs our REO portfolio to find low-value properties, properties that have been listed for an extended time period. They just aren't selling; they're difficult to move.’

Wells Fargo provides clear title after paying any outstanding liens, fines and past-due taxes on the donated properties. ‘For the discounted sales,’ Smith adds, ‘we have a first-look process so that approved nonprofits and government entities get to see a property before it's even on the market. They don't have to compete against anyone, and it's discounted based on the anticipated holding cost – so we get savings by selling it up front.’

Wells Fargo also works with the NCST, and it operates its own list of nonprofits with which it works directly, Smith explains. ‘We go through a vetting process to look at what they're doing with the properties, what their history is and their financial ability to maintain these properties.’

James O'Donnell, community revitalization program manager at Chase Bank, stresses the importance of choosing ‘the right strategic partner’ in order that the desired outcome to be achieved.

‘It's about creating affordable housing; it's about stabilizing and revitalizing the community – and that takes a great deal of diligence, which is why we select our partners very carefully,’ he says. ‘Nonprofits have to apply to participate, and we select them based not just on their financial capacity to rehab homes and get them back on the market, but just also their experience in creating affordable housing.’

To expand its list of approved nonprofits, he says, Chase holds weekly webinars to discuss its program with interested nonprofits.

The NCST receives lists from 14 financial institutions and more than a dozen servicers, which it then incorporates into its own weekly list, Gardner says. Nonprofits get ‘first-choice’ or ‘first look’ from these listings, as they do with similar listings from Citi, Chase, Wells Fargo and others, before the properties are made available on the open market. Discounted sales prices are established in different ways, most often by subtracting from its market value the costs that would go toward securing, maintaining, managing and marketing the property and paying a real estate broker's commission.

Wells Fargo takes a similar approach, according to Smith, who says its servicing clients, as well as the bank itself, accepts its net-present-value calculator.

‘We're talking low-value properties,’ he points out. ‘So at the end of the day, we tell them they're not going to be netting much. Then when you factor in what you're paying in maintenance costs, holding costs and commissions over the expected holding time, most often, the properties are netting out negative. So it's better to just eliminate that loss right now and move it on through donations.’

When determining the discounted price, Chase takes into consideration its past efforts in the community in which the property is located, its past experience with the nonprofit that wants to purchase the property and the number of other REO properties it has in that community.

‘Since 2009, we have initiated over 3,000 property transactions through our program,’ says O'Donnell. ‘From a donation standpoint, that number is just shy of 1,000. We were active last year in 28 states.’

Chase also sends out a weekly list of available properties to ‘all of our nonprofits so our local community partners can see the inventory that's available to them and get a first-look opportunity,’ O'Donnell says, adding that nonprofits can also choose ‘anything that's out on the open list that we don't have an offer on. If they express interest, we will pull those properties and put them back on our discount sale or donation program.’

Land bank deposits

Another avenue that is being pursued for donated properties are county land banks in urban areas. Cleveland-based Cuyahoga County Land Bank is among the most prominent, according to Jim Rokakis, director of the Thriving Communities Institute and former treasurer for Cuyahoga County, who notes that there are now nine other land banks in Ohio plus one in California. Rokasis adds that he has received inquiries about setting up land banks in Indiana and Louisiana.

‘The Cuyahoga Land Bank has had considerable success,’ says Rokakis, whose organization is in the process of establishing land banks in every Ohio county. ‘People are looking for additional tools to deal with this glut of vacant properties. Land banks provide that opportunity. Lenders are very interested in what is happening with land banks because they recognize it's a convenient vehicle for them to take low-value properties. It took lenders a while to understand how the tool works, but there has been more and more lender participation.’

However, Rokakis notes that land banks will not automatically take everything sent their way.

‘The land banks are very reluctant to take low-value properties, unless there is a willingness on the part of the lender to make a monetary contribution for the cost of demolition,’ he says.

‘We have a very strong relationship with the Cuyahoga Land Bank,’ says Chase's O'Donnell. ‘They've taken a lot of low-value properties and either revitalized them or demolished them and built brand new homes or turned the lots into green spaces. That definitely is a component of the program, depending on the value.

‘But clearly, not all of our donations are low-value assets,’ he continues. ‘Some of them are donations to community partners to help them do what they do well: to create affordable housing. So our donations are a mixture of low-value properties that may have to be demonstrated and homes that just require some rehab but can certainly be revitalized to create homeownership for somebody.’

Wells Fargo also works actively with the Cuyahoga Land Bank, says Smith.

‘If we identify a property in Cuyahoga County that's eligible and approved for donation,’ he explains, ‘we will first offer that property to the nonprofits in Cleveland just as a regular donation. If none of the nonprofits accepts the property, even for free, we know there's really not much likelihood of us being able to sell the property without putting considerable rehab funds into the home. These are the properties that need to be demolished. So then we contact the land bank. We have an agreement with them that we will contribute towards the demolition costs.’

According to Robert Klein, founder and chairman of Valley View, Ohio-based Safeguard Properties, land banks offer two advantages over local housing nonprofits: They have the authority to dismiss municipal code and other violations. In Ohio's Cuyahoga County, the land bank, as a governmental organization, is ‘willing to wipe out most of the code violations because it's in everybody's best interests to do that,’ he explains.

Furthermore, land banks can find numerous nonprofit community development corporations (CDCs) for a large number of properties in one sweep.

‘CDCs will take properties, but they'll take one here, one there,’ Klein continues. ‘The CDCs are not set up to accept properties in volume, and servicers have quite a bit of volume of vacant property. So you need to look at this as more of a wider targeted area instead of just as one-by-one properties. There are just too many properties, and if you start playing around with these one at a time, it's not going to fly.

‘So if you can do this on a larger scale [through land banks] it's going to be beneficial to everybody,’ he continues. ‘But there's very few areas of the country that have [county] land banks that can accept properties from a county point of view.’

For the NCST's Gardner, this outreach by servicers is an example of successful corporate social responsibility.

‘Servicers want to be good supporters of stabilization efforts,’ he says. ‘There is the public reputation and the charitable giving aspect of it, but it also makes good business sense,’ he says.

‘It's certainly a feel-good story for us,’ agrees Wells Fargo's Smith. ‘We love the success stories. But at the end of the day, we still have to make the financial case to the investor why this is in their best interest, and we're able to do that. You look at what your expected holding time frames are going to be and what you're going to net at the end versus just donating the property and being done with it now.’

Jerry DeMuth is a freelance writer based in Chicago.

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Comments

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