REQUIRED READING: New Ideas For Mending Worst-Case REOs

Written by Derrick A. Logan
on July 01, 2009 No Comments
Categories : Required Reading

eclosed homes that are advertised as ‘bargains’ are not always[/b] good deals, especially when there are extensive repairs that need to be performed before the house becomes a home. Usually, a bank in possession does not want to be responsible for these repairs and instead sells properties ‘as-is’ to minimize its own involvement in the repair process. ‘As-is’ is not always’move-in’ condition, but some properties are in a more disastrous state than others. For example, a home that has been broken into or vandalized obviously loses some of its curb appeal, as do homes that have unkempt lawns and garbage or flyers strewn across the yard. The interior is an entirely different story. Aside from termites and asbestos removal, which are generally acceptable, moisture intrusion in the walls could bring a need for a mold detection expert to come in and do testing. Inevitably, if there is mold, ripping open walls for removal is the next, very costly, step. The cost becomes more than the bargain. Tragically, there have been many instances of properties containing methamphetamine labs on-site. Inheriting a crime scene, though not uncommon, is always a shock for a property inspector or preservationist. After the initial shock subsides, another shock – sticker shock – takes hold. The costs involved with resolving potentially dangerous scenarios like these can run from $20,000 to $30,000, and sometimes more. The eradication effort required for a meth lab could mean anything from the quarantine of the property to the total demolition of the structure. Depending on the saturation of toxins in the walls and floorboards, and the removal of the chemicals stored to produce the drug, the cost of cleanup could easily outweigh the total property value. After all is said and done, disclosures become mandatory, but who wants to buy a rehabilitated meth lab? A worst-case scenario real estate owned property (REO) could include all of these issues and more, depending on the area and history of ownership. Although these situations constitute a small portion of most servicers' portfolios, they will certainly weigh in at a higher expense ratio. This means that they shouldn't be ignored or written off as insignificant. This type of property reduces the quality of life in neighborhoods by lowering property values, not to mention posing public safety problems. [b][i]Maintaining security[/i][/b] Properties that have been broken into need to be secured and, ideally, outfitted with a variety of protection options. Instead of simply boarding up a home that has broken windows or had a fire, surveillance cameras and steel shutters are new deterrent options for protecting and preserving properties from further vandalism. Surveillance cameras are sometimes inoperable copies of the real thing, strategically placed to give the appearance that the home is being monitored. Steel shutters seal the windows and doors much in the manner that wooden boarding did in the past, but more effectively. These steel casings, for both doors and windows, have introduced a new level of security, as they fit snugly over windows and doors so that burglars cannot use a crowbar to pry them off. Additionally, many professionals believe they hold an aesthetic edge over their wooden counterparts. The window screenings let in natural light and air, allowing construction workers or buyers to walk through the house without feeling like they are in prison. The frequency of these far-from-desirable houses is, unfortunately, increasing, and is directly related to their concentration in specific areas. Although most of these worst-case properties are found in inner-city neighborhoods, so-called good neighborhoods are facing similar declines. Certain areas require more attention than others, but nowadays, the old "can't judge a book by its cover" adage holds true. [b][i]Community efforts[/i][/b] In this current foreclosure climate, lenders are finding it difficult to maintain responsibility for the maintenance of so many suffering properties left in distress. Numerous cities have instated ordinances, which allow fines and liens to be placed on these homes in an effort to expedite the cleanup and reduce the decline of property values. Unfortunately, the financial institutions are bearing the brunt of exorbitant fines coupled with court-ordered repairs. Some cities, like Chicago, have made extra efforts to address violations. Chicago has implemented a number of initiatives, including the Troubled Buildings Initiative, the Vacant Buildings Program and the Homeownership Preservation Initiative. The Troubled Buildings Initiative ensures that code violations are not only identified, but also addressed and resolved in a timely manner. Its goal is to decrease the negative impact of these troubled buildings on the surrounding areas. The objective of the Vacant Buildings Program is to decrease the 475 open buildings in Chicago (among a whopping 5,100 vacant buildings that are considered less threatening than open homes) by 75% in one year. This will be achieved by securing the buildings according to municipal code, making them inaccessible to the public and off-limits to criminal activity. Rehabilitating, demolishing, forfeiting or selling at least half of the buildings is also part of the plan. The Homeownership Preservation Initiative works with families and nonprofit organizations to help them from going into foreclosure. Another campaign hoping to make a difference is the National Vacant Properties Campaign. Based in Washington, D.C., this effort focuses on developing a national network of vacant property practitioners, providing tools for research, making a case for reclamation efforts and through technical assistance and training, and building the capacity of local, regional and national practitioners. This business is a network used to better prevent abandonment and encourage reclamation, making the property again a vital place to reside. The job of servicers is to make this happen by identifying the homes that need more attention and eradicating the issues. This not only entails protecting the property, but also the public. The more homes in this condition there are lining our streets, the worse a neighborhood becomes, in turn, lowering property values and continuing an already steady and steep decline. In some instances, property values are so low compared to what is left of the mortgage that fixing the home does not seem like a worthwhile cause. The flip side is that even though money is constantly being lost on these properties, the cost of repair usually outweighs the liability that would come with an incident. Losses are heavy, which increases insurance premiums, so keeping down claims is a priority. The goal of compliance remains the same for the municipalities, servicers, outsourcers and banks. Parties responsible for vacant properties are accountable for the condition of the property, and they must not allow their holdings to contribute to neighborhood blight. Those parties that are not paying attention now assuredly will be after a visit from the local compliance officer. By being professional and proactive, industry members must work together to transform struggling neighborhoods across the U.S. back into desirable places to live. As long as foreclosures have existed, there has always been a small percentage of properties in truly treacherous condition – it just comes with the territory. But with all of the advanced options available today, a worst-case REO should never remain in disrepair until it reaches the forced compliance stage. [i]Derrick A. Logan is executive director of REO Allegiance Inc., a nationwide property preservation and eviction service company headquartered in Bayonne, N.J. He can be reached at (888) 727-6303.

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