As the number of real estate owned (REO) properties entering the market continues to decrease, many servicers still find themselves with difficult-to-manage REOs that have become increasingly more challenging to liquidate. According to CoreLogic’s National Foreclosure Report, the national foreclosure inventory fell by 30% from August 2015 to August 2016. In today’s market, REO prices are increasing and cash sales are steadily declining; CoreLogic reports that in June, cash sales fell below 30% for the first time since the housing crisis. REOs are not moving quickly, and the longer these properties remain on the market, the more costly it is to maintain them.
In light of the current state of the market and the distressed assets within it, more servicers are seeking alternative means to manage their REO portfolios, and some are considering non-traditional methods. REO inventories have become increasingly complex, and not all properties may be suited for sale through customary channels. Considering a variety of methods that best suit local communities and their individual needs is more conducive to today’s requirements because successful disposition of REO assets involves several key components, from a strong field presence, to a deep understanding of the property and local market. To achieve success, servicers should at least consider a range of options to exercise in order to liquidate their assets quickly and efficiently.
REO third-party asset management
One option to consider is selling by assigning the asset to a third-party asset management company (AMC) that will oversee the management of the disposition process through traditional means. A third-party AMC will carefully select local real estate agents, property preservation vendors, attorneys, title agents and vendors. By relying on a business partner with the necessary expertise to perform those duties each day, servicers can, instead, turn their focus to managing overhead costs, carrying costs and turn rate with the ebb and flow of local markets and the fast-moving pace of distressed asset bulk sales between parties.
Auctioning properties traditionally and online
Another method that servicers may wish to consider for REO asset management is selling REOs through an auction process. This is sometimes done directly with the servicer client or through the third-party AMC, wherein servicers can sell smaller quantities within a whole portfolio through third-party auction companies that market to both investors and individual consumers. This method can be particularly effective due to the growing popularity of online auction platforms. These platforms remove geographic limitations and are highly accessible to potential investors who might be considering getting involved in the process.
Aside from the obvious benefit, an accelerated sale, selling REOs through an auction process can also expose the property to a larger number of prospects and create competition among buyers. The auction process has a reciprocal value for buyers, too, providing confidence in the seller’s commitment, eliminating long negotiation periods, and determining the purchasing terms and closing dates with certainty.
Selling assets in bulk
In certain instances, time constraints, combined with the complexity of regulatory requirements, can point servicers in a direction that reduces the focus on individual properties and, instead, takes a volume-based approach. Servicers that find themselves in this position should consider selling through bulk sales that focus on homeownership by partnering with local and regional housing authorities whose interest it is to rebuild communities and provide a positive impact on affordable housing initiatives. This not only helps servicers to liquidate a large number of assets at once, but it also does so efficiently and compliantly.
Repairing and remodeling assets to maximize returns
In the midst of the housing crisis, the market was ripe with a vast inventory of properties and entrepreneurial investors who were not interested in a repaired or remodeled home. The interest was to perform those improvements and resell or rent the homes for long-term profit. However, as the number of foreclosures declines and servicers shift away from a focus solely on volume management, there’s room to consider how repairing, updating and remodeling a property can assist with the recovery of losses and in the recovery of the housing market.
Renting REOs to maintain the property
Current loan qualification criteria naturally lends itself to an elite group of borrowers. After the housing crisis, underwriting guidelines restricted many from homeownership because of poor credit ratings. Additionally, with the uncertainty of the market in some areas across the country, the rental market drives out homeownership to a traditional buyer, increasing the cost of a home and making it simply unaffordable. In those areas of the country in which the market is unstable or more conducive to rental properties, retaining the REO by combining a repair/remodel method creates a “reperforming” asset by recovering carrying costs and waiting out the market until such time areas are financially sustainable to sell the property in more traditional standards.
The market today has made it difficult for servicers to efficiently liquidate their assets. However, there are non-traditional options that they can consider when managing their REO portfolios. When selecting the most effective method for managing an asset, servicers have various considerations to take into account, ranging from property value, to property type, to property location – all of which are equally important. As servicers address the evolving market and the difficulties associated with it, those that are willing to expand their range of options to manage their REO portfolios are sure to find the most success.
Angela Hurst is senior vice president of business development for USRES/RES.NET, a provider of real estate appraisals, broker price opinions and REO disposition services. She can be reached at email@example.com.