Rehabbed REOs spend less time on market

Investors perform fix-up work that banks can't afford to do

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Apr. 22, 2011

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Investors perform fix-up work that banks can't afford to do

Steve Bergsman
Inman News™

Most Realtors recommend sprucing up a home before putting it on the market, because a nicer-looking home sells quicker. The same theory permeates the foreclosed, or REO (bank-owned real estate), sector.

A recent study undertaken by a national field service company that works on REO properties not only confirmed what was at most an empirical belief among Realtors, but accentuated the difference between rehabbed and nonrehabbed properties.

Ironically, all this proof of purpose comes down at a time when the banks have not only slowed the rehab of REO properties, but also constrained the pipeline of REO properties for the open market.

Field Asset Services Inc., an Austin, Texas-based property preservation and REO asset management company, for two years now has surveyed foreclosed and REO properties comparing number of days on market (DOM) for remodeled properties versus those that are not remodeled.

In the company's initial study two years ago, rehabbed properties spent 54.6 percent fewer days on market than unrehabbed properties. In its most recent study, published earlier this year, results showed a dramatic 68 percent reduction in DOM for properties that underwent rehabilitation.

For the present study, FAS tracked 17,252 properties across 13 states. The average DOM for the properties represented without rehabilitation was 222.8 days. This number dropped significantly for properties with rehabilitation to 69.8 days.

"When a home looks better, it sells faster," said Javier Zuluaga, director of sales and marketing for Home Repairs and Remodeling (HR&R) LLC in Tempe, Ariz. And the banks believed that to be true, too, because starting in 2008 they were paying HR&R about $7,000 to $12,000 to do basic rehabs on REO properties: clean, make ready the pool, replace the carpet, and replace or repair cabinets."

The banks still believe in rehab; nevertheless, that business has gone away.

"What happened was," Zuluaga explained, "the banks could not keep pace with the down-spiraling prices. So, sometime around 2009, the banks simply said, 'We are not going to put all this money into it. We are just going to get the properties cleaned up and if it is missing cabinets, it is missing cabinets -- that's just the way it is.' "

Zuluaga added, "When we rehabbed, homes did sell quicker, but it got to the point where the banks realized they were putting money into the homes but were not getting their price points back. The homes were selling but the banks just ran out of funds."

Field Asset Services has also seen its business decline.

"Business started to decline around last October and has not kicked back up," said Dale McPherson, president of FAS. "Our business is down about 25 percent."

That drop-off is attributed more to congestion at the banks rather than the expenses of rehab.

Mortgage servicers are having to redo their foreclosure compliance work sometimes three or four times in order to get a property into foreclosure.

"What has happened is the average foreclosure time frame has gone from seven months in 2008 to 18 months today," McPherson said. "The pipeline is bundled up. At some point, it has got to unravel -- it has to!"

The REO market has definitely bifurcated between owner-occupant buyers and investors, and the two markets vary immensely.

About the only dependable financing for buyers who want to live in the property they are acquiring are those insured by the Federal Housing Administration, which is a division of the U.S. Department of Housing and Urban Development. To get an FHA loan, the prospective home has to meet minimum standards.

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