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Remembering the REO Basics

Apr 04, 2011

It was probably 1974 when I managed my first real estate-owned (REO) property. Foreclosures were rare and there was plenty of time to give individual attention to each REO asset. How times have changed! The one thing that hasn’t changed for anyone managing an REO portfolio is the need to dispose of the inventory as quickly as possible, while at the same time, maximizing recovery. Which of these two areas takes priority at any given time is based on the makeup of your portfolio and internal goals. Your marketing strategies will be formulated based on that priority. As your inventory swells, every market seems to be saturated with REOs, and everything starts getting really complicated, it is tempting to start looking for a gimmick. Oftentimes, the key to keeping things manageable is simply remembering the basics. I’ve broken this down into some areas that I think every REO manager must consider. 1. Obtain reasonable valuations and price your properties to reflect current market conditions. 2. Choose the right partner for the job. 3. Maximize value. 4. Evaluate performance. Obtain reasonable valuations You notice that I said “reasonable” rather than “accurate.” I really don’t know how to determine if a broker price opinion (BPO) or appraisal value is accurate; only if it is reasonable. Experience shows that if you have a reasonable valuation, you most likely also have an accurate one. We determine reasonableness by reviewing the valuation for certain factors. Are the sold and listed comps used really comparable to the subject property? Are the comps the same age, style, condition and location? Are the sold comps used reflecting current sale dates or stale? How long have listed comps been on the market? Have reasonable adjustments been made for differences in the comps used and the subject property? We are selling an REO … are we using REO comps? Because having a high confidence level in the valuation is so critical to pricing, we always recommend getting multiple valuations. A little extra money spent in this area can make a big difference in your overall recovery rates. I have worked in environments where the acceptable sales prices were based on a percentage of the remaining principal balance of the loan. In today’s market, I believe that acceptable sales prices must better reflect the current local market conditions and pricing set based on current valuations. Otherwise, your properties sit and carrying costs escalate. Choose your partners carefully It doesn’t matter if you manage your inventory in-house or outsource to asset management companies, you have to rely on partners nearby the property. We have found that the key partnership is in selecting the right listing agent for the property. It seems that today, every agent out there wants to be an REO agent. That is understandable since that is where the sales are, but wanting to sell REOs and being qualified to sell REOs is very different. It’s kind of like the dentist from the United Kingdom that I met a couple of years ago while on vacation. He told me that Botox injections were all the latest rage in the UK and a lot of money was being made. He was going to take a two-day training course and start administering Botox. Maybe there are some folks out there that will get Botox injections from a dentist, but I think I’ll pass! In addition to understanding local market conditions and the special challenges associated with marketing REOs, a good REO agent is also up to date on the latest code requirements, vacant property registration requirements, city-required inspections and all of the other ever-changing local requirements for REO/vacant properties. Keeping the property in compliance with local codes and requirements can save the seller a lot of unnecessary expense from fines and assessments, as well as keep the migraines to a minimum. We have a number of agents that do a great job selling properties in the $30,000-$150,000 range but do not do well on the high-end luxury properties. Other agents are great on the high-end, but not on the average properties. To obtain the best results, we always want to use the specialists. Maximize value The age old question … do we rehab the property? If so, to what extent? What kind of repairs are really necessary? The old adage of “throwing good money after bad” is true so you have to be careful. Likewise, “you have to spend money to make money” is also true, but again, you have to be careful. The key is to understand which one applies so that you are making an investment rather than incurring an added expense. I have worked with institutions that had hard and fast policies on REO repairs and rehab. I worked with one that wanted every property rehabbed to “AS IS” means “AS IS,” and outside of required preservation, wouldn’t spend a dime. Neither had any real flexibility. In today’s market, common sense, flexibility and good judgment are the keys to maximizing value on your REO sales. Extremes in either direction will end up costing you money. You have a lot of information available to you to assist in making these decisions that may not be obvious. For example, a good BPO will tell you, based on property condition, value and location, who the most likely buyer will be. Are we marketing to an investor or an owner occupant? The agent will provide recommendations as to the minimum repairs needed to attract the target buyer. The BPO should also tell you if the property will qualify for most financing types in its current condition, and if not, what issues must be addressed in order to qualify. Additional information is available in the BPO that can be used to solidify your decision. Is the neighborhood stable or on the decline? How many properties are currently for sale in the area and how many of these properties are REOs? Are there boarded up properties in the immediate vicinity, and if so, how many? What is the percentage of rental properties compared to owner/occupied properties in the neighborhood? Use the information available to identify your target market and understand what is necessary to meet the needs of that market. For years, the primary market for REOs was investors. Over the past few years, we have seen a large increase in the number of buyers looking to purchase a primary home. Sales to owner occupants are generally going to bring a higher sales price, but there are also generally more issues to be addressed on these sales. Most homebuyers are going to require financing. While you can get the buyer to insure that they have the required funds for downpayments and a pre-approval from a reputable lender, the property also has to qualify for the loan. By recognizing and addressing any property issues that would limit financing upfront, not only are you going to save time in getting the deal closed, but will often generate higher offers. Your asset managers need the information to develop an effective marketing plan for each property and the flexibility to implement it. Evaluating performance One thing that I was taught and have never forgotten is that you cannot manage what you cannot measure. You have to know if your disposition strategies are working effectively so that adjustments can be made as needed to maximize performance. We constantly evaluate our performance and the performance of our partners (agents, closing companies and valuation specialists) against a standard for our key performance indicators. While a number of areas are tracked, our key measurements for the disposition process are average days on the market, average sales price to list price, average sales price to valuation, and average days to close once under contract. These measurements are drilled down to the individual agent, title/closing company, or appraiser level and allow us to base our partnership decisions on objective data. This also allows us to recognize when we need to modify our processes or partner relationships to meet specific client needs. With everyone from the federal government to local municipalities and homeowners associations (HOAs) getting involved and imposing obstacles to the REO management process, you will certainly continue to be thrown curveballs and flexibility will be required. In this ever-changing environment, a continued focus on the basics will generally serve you well. Keep in mind, you can try the trick plays, but it is more often the best blocking and tackling that wins the close games. David Shelton is chief operating officer of Turnkey Asset Management Solutions in Newport, Ky. Turnkey manages the preservation, valuation, and disposition of REO properties on a nationwide basis. He may be reached by phone at (859) 815-6905 or e-mail [email protected].  
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