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.
"To buy, you have to be able to finance through HUD because until recently there has been no other financing available, as there is very little conventional financing," said McPherson.
"In order to sell to a HUD buyer, you have to have a move-in property. It has to pass HUD’s appraisal standards. You can’t buy a property ‘as is.’ You can’t buy a property that doesn’t have working appliances, missing countertops or chipped paint."
On the other hand, investors prefer the beat-up home. They pay cash, try to close quickly and will take care of rehab themselves.
According to Zuluaga, "the investors are making the margins that the banks are not making now," which is good business for companies like HR&R.
"The private guys are hiring us; they are buying these homes at a very low price and hiring us to do the remodeling," Zuluaga said.
When a cash buyer steps in, he is going to expect the (mortgage) servicer to "take a haircut," McPherson said.
Then comes the remodeling. Investors are either going to fix the homes up and resell, or fix it up and lease. The key for investors is getting the proper valuation to ensure, at minimum, a least a dollar-for-dollar return on the investment.
Investors have to do a valuation on both repaired and as-is sales, because that’s how they determine their repair margin. For example, a home is worth $90,000 as is, but after repair could be sold for $100,000. The owner, bank or investor gets a repair bid, which comes in around $7,000. The margin of $3,000 is generally enough to go ahead with the repairs.
"I would contend," McPherson said, "based on our results, you are still going to sell the house faster — even if it is only a dollar-for-dollar return — if you fix it up. In a market such as Phoenix, where there is an immense amount of foreclosed homes, you might see five or six REO properties on the same street. If you want to compete, you need to have the best-looking house on the block."