Bucking the Trend

Conventional wisdom says that keeping rehab costs at a minimum is the best was to recoup losses on vacant and abandoned properties. The conventional wisdom may be wrong.

By Scott Morgan

(Editor's note: This special print feature originally appeared in the December 2015 issue of DS News magazine)

Imagine for a moment that a house in your neighborhood suddenly becomes vacant because of a foreclosure. It’s not a bad house. It’s not a bad neighborhood. But you know that someone is rumored to be in the process of buying the property. Do you hope it’s an investor or do you hope it’s someone who is going to move in and pretty the place up?

Unless you’re an investor eyeing a sweet deal, the odds are good that you’d rather see an owner-occupant buy and move into that property. Tyler Smith, vice president of Wells Fargo’s REO alternative disposition sector, understands that sentiment. As someone whose business is to help make sure that vacant properties are kept in marketable condition until they’re sold, Smith has heard the worries that some have whenever there’s a vacant property down the road.

“One of the biggest complaints we hear is that an investor steps in and there goes the neighborhood,” Smith says. “Neighbors want neighbors, not absentee investors.”

But how do you make a property something that appeals to someone who wants to make it their new home, as opposed to something that appeals only to investors? Wells Fargo’s approach has been to step up preservation efforts beyond the entrenched “white box” measures that so many banks and property preservation companies have taken. Time was, work done to a vacant property was of the good-enough variety ‒‒ basic paint, basic patchwork, usually bland and generalized and little more.

Wells, however, has taken the position that putting a little more effort into properties actually generates a much healthier return. That’s not just dollars. It’s also in good will to the neighborhoods where Wells is invested.

“We’re trying to do the right repairs for the right property,” Smith says. “We want to make the home financeable.”

The number of neighborhoods Wells is invested in, by the way, is significant. The bank services one out of every six mortgages in the United States, meaning that if your neighborhood has at least six houses, there’s a good chance one of them is occupied by a Wells Fargo customer.

So Smith’s statement is not just talk. Wells has a lot at stake when it comes to caring for and preserving vacant properties. Part of what the bank has at stake is the good will of the neighborhoods, because if a neighborhood goes awry from too much absentee investment, Wells will have a front row seat to the problem.

Making the right repairs ‒‒ optimizing a property ‒‒ is as much art as science. For understanding what an individual property might need, Wells relies on property preservation partners like Alacrity Services, based in Eugene, Oregon and preservation services company owned by Lowe’s.

It is an elegant ecosystem. Wells has a network of bank-owned properties around the country; Alacrity has a network of independent professional contractors around the country; and Lowe’s has roughly 1,800 retail centers around the country. When Wells wants to get a property off its REO rolls, Alacrity supplies local contractors to identify the repairs needed and do the work. Meanwhile, contractors hired through the partnership can buy supplies at a nearby Lowe’s at a discount.

“They’re the ones with boots on the ground,” Smith says about the bank’s reliance on Alacrity’s network of contractors. And while it’s taken time to get in sync, Smith says the Wells/Alacrity partnership has jelled well. Alacrity partners now know what the bank is hoping to do with a property and Wells knows better what the contractors need to get the job done the right way.

Knowing how to right-fit a property can certainly be an involved equation. There are, of course, calculations for physical repairs, which in most cases involve one or more of the “big five” repairs needed ‒‒ paint, carpet, flooring, plumbing, and electrical. But then there are issues like mold that often show up in some houses, and depending on the type and extent of mold, it could add a significant amount to the total bill for making a house saleable to everyday buyers.

Making the right repairs ‒‒ optimizing a property ‒‒ is as much art as science.

There is, of course, no one-size-fits-all formula. Rather, Smith says, figuring out what to do, is a matter of finding “that sweet spot” where money invested in a property is not just a lot of lost money.

It may surprise you, actually, to learn that optimal repairs for houses Wells wants to make financeable to occupying buyers is not actually a moneymaker for the bank. The best-case scenario, Smith says, is typically a break-even. This is actually what puts Wells’ approach ahead of so many other institutions when it comes to investing in foreclosed properties on its books. So many institutions have shied away from putting some extra money into their properties because they do not see the profit.

Well, the profit isn’t immediate, and it’s not all about hefty financial gain, but it is there. Remember, good will is part of the equation. Wells wants its customers to know that it actually cares about the neighborhoods. And the money the bank could make will come from someone who buys an REO property and makes it a home and get financing through Wells.

Smith says that properties are not necessarily getting to the market faster, but that homes are selling faster once they’re actually on the market. For example, it might still take two months for a house to go from vacated to sold, but it would not be on the market for the whole two months. Repairs might take, say, one month, and then time-on-market another month.

“It’s not about time,” Smith says, “it’s about the return.”

However, the time a property spends getting from vacated to sold is greatly affected by its geography. On the East Coast, for example, where houses are older and have been exposed to more types of weather for more years than houses on the West Coast, a property could reasonably take two or three years to get sold, Smith says. These properties simply need more work, but the work pays off by leading to a home that is in far more stable and appealing condition than a fixer-upper that’s in really bad shape.

One slice of geography where’s Wells’ efforts are making a notable impact is Chicago, and Smith is glad to see some positive attention paid to the usually dour foreclosure/resale news coverage there. Most news stories about the fate of neighborhoods hit by recessions and foreclosures are negative. And while this might sound like the obvious way to cover neighborhoods in crisis, Smith says that too much coverage about what’s gone wrong has the far-reaching effect of keeping a neighborhood in crisis.

“A negative story in the news every week has a negative impact on homes in a neighborhood,” Smith says. People hear that an area is in decline and conclude that it’s not the place to make a home. Consequently, values stay low, community pride suffers, and neighborhoods wade through the miasma of a self-defeating dynamic. “We’re trying to reverse that,” he says.

The banks' efforts are being noticed in Chicago, which was one of the country’s worst-hit areas during the recession. But the work done by Wells and Alacrity to right-fit homes, to invest a little more time and money in making vacant places actually livable again has helped pull neighborhoods there from that self-defeating cycle.

So far in 2015, according to Wells Fargo data, the bank has increased the value of its REO inventory in Chicago by an average of 13 percent. “We have spent over $29,000 per property to do this,” Smith says.

Along with more involved repairs, Wells also allows owner-occupants the first crack at buying an REO property. The first two weeks a property is listed, the bank only accepts offers from those who want a primary residence.

The one-two punch of better repairs and occupant-friendly sales periods is paying off big, especially in Chicago. This year, Wells reports, nearly 79 percent of its repaired REO inventory there has sold to owner-occupants.

That is no insignificant statistic, by the way. Nationally, the percentage of people who own a home and use it as their own primary residence is hovering around 65 percent. “If we didn’t do anything,” Smith says, “we’d be at the national average.”

As for the future, both Jay Rebello, vice president of new business development and corporate innovation at Lowe’s, and Alacrity CEO Jonathan Miko see the evolution of the partnership as nothing but positive. Wells will continue to provide access to properties and handle the financials, Alacrity will provide the experts, and Lowe’s will make sure the contractors get what they need when they need it.

“I think we’ll keep expanding to different parts of the country, and we’ll continue to serve their brands of business” Rebello said of Wells Fargo and Alacrity.

Miko said: “We see a lot more steady work that’s more spread out and not just concentrated in one area at a time.”