How To Manage And Market Foreclosures
When a bank’s level of non-performing loans and foreclosed assets increases to the point that the bank’s costs and expenses exceed its revenues, the resulting deficit erodes the bank’s net worth and reduces stockholders’ equity. Depending upon the particular bank’s level of net worth, a serious problem will result at some point in time unless steps are taken to mitigate the problems. This article deals with the administration of real estate properties that have already been foreclosed.
It is extremely important that the lender thoroughly evaluate and understand the loan documents, and local foreclosure laws. Depending upon the various factors contained in loan documents and the nuances of state foreclosure laws, there are usually factors that dictate the timing of when a foreclosure must be initiated. In some cases, a lender’s failure to initiate a foreclosure at the proper time might result in the postponement of the foreclosure to a much later time, allowing further arrearages to accrue and possibly further deterioration or damage to the collateral property.
Once the foreclosure decision is made, the bank needs to automatically involve its foreclosed property department.In the common language of a commercial bank, foreclosures are known as “OREO” (Other Real Estate Owned), as separate from the properties the bank uses and operates, such as their own offices. The equivalent term at savings banks is Real Estate Owned or “REO.”
Here are some guidelines for the successful management of foreclosed properties:
- Make sure that the homeowners’ or fire and extended casualty insurance is cancelled and that the property is added to the bank’s blanket insurance policy for foreclosed properties.(Note: I have seen properties and profits literally up in flames where there was missing coverage due to not keeping track of this.)
- Assign the responsibility for managing foreclosed properties to one person. If the level of foreclosures is sufficient to occupy one or more people fulltime, then this person almost certainly must be a new-hire.There’s no reason to rely on the loan brokers that helped create the bad situation to magically solve the problems that they didn’t think could happen.It is very helpful to have some “distance” between the OREO/REO professionals and the borrowers.
- Secure the properties immediately after foreclosure or abandonment.There must be a central key repository in the OREO or REO department.
- Keep the properties looking decent. Do whatever is required to avoid deterioration of the properties.There are no buyers who enjoy unattractive properties.
- If there are things to be fixed on the property, find a “buy & fix-it-up” expert, and provide financing to make an attractive deal for all involved. Include a commitment to provide financing for the ultimate customer to whom the fix-up specialist will sell.
- Put up the “For Sale” signs immediately after the foreclosure. (Note: It is astonishing to me how many times I have gone into OREO and REO operations and found management amazed that a property has not sold, yet there is no “For Sale” sign on it!)
- Only list with a real estate agent if truly necessary.Your REO or OREO team will know the ins and outs of the property better than any real estate professional, and your financing will be an attractive consideration for the buyer.You are the one to control the financing, not the a real estate agent.
- Talk to the people next door and around the foreclosed property. Often, their families and friends are prospective purchasers. Your offering favorable financing might be the factor that tilts the scales in favor of a relative relocating close to another relative.
- Inspect the properties regularly, and document what you find. Take any needed corrective actions immediately.
- Offer good financial packages to allure buyers.Remember that once you have a sale, the property starts making money instead of just consuming it.
- Consider holding periods and the net present value of a probable future sale when setting a sales price.The “net” in net present value allows for the holding costs which include taxes, maintenance, and any expenditures such as carpeting and other expenditures that may be required for good property marketing.
- Attend OREO and REO activities at Board of Directors meetings. Directors often have market knowledge and contacts that can help with OREO / REO problems.
Getting all of these done can be quite a challenge. It requires special expertise to initiate all of these various activities and to keep them moving toward the multiple finish lines
This article was written by a professional banking expert witness. He is a manager and banking regulator, has successfully managed millions of dollars of distressed and foreclosed properties including single-family houses, condos, and land developments, apt complexes, and many others across the country. He is available on a contract basis to discuss your bank’s particular needs at an expert witness services company. See all professional and legal expert witnesses with full C.V.’s.
