From Redos to Done Deals

*_Professionally Rehabbed REOs Result in Minimized Sales Cycles, Maximized Returns_*

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Although it's fairly certain the current market is headed for more change, the exact path it will take is anyone's guess. Some say a flood of foreclosures will cause housing inventories to explode and housing prices to crater. Others say the collective system-courts, foreclosure processing units, listing agents, asset managers, property preservation companies, and the like-will not have the capacity to handle a large spike in volume, thereby delaying the surge. Others say that the Obama administration and/or Congress will pass another round of modifications and moratoriums. And all this at a time when countless derelict and decaying REOs sit empty, with many more waiting in the wings and headed for the same fate.

What we do know for certain, however, is that the backlog of homes poised for foreclosure-the so-called shadow inventory-has not made it into the pipeline for a number of reasons, including moratoriums, loan modifications, and other mitigation techniques. Short sales have taken some properties off the market, but the surplus is not going away and is, in fact, increasing daily. Until employment comes roaring back, there will not be enough qualified homeowners to absorb this inventory-an inventory that includes many ramshackle residences in dire need of TLC.

So no matter if the shadows appear in a storm or a trickle, they will unquestionably hit the market. And until there are qualified homeowners who can take out mortgages and find funding to support the demand-and who don't bristle at buying neglected fixer-uppers-there will be an abundance of foreclosed vacant homes that need marketing, time, and extensive rehabilitation to ready them for resale.

We are seeing some changes in legislation that will provide a small amount of relief. Earlier this year, the Federal Housing Administration (FHA) announced that it waived its ""no flip, 90-day seasoning rule"" for at least one year, effective February 1. Under current protocol, the FHA will not insure a mortgage on a home owned by a seller for less than 90 days. This rule has made many investors unwilling to flip their homes to buyers using FHA loans because of the expenses associated with allowing a property to sit vacant over a 90-day period, like holding costs, upkeep, and potential vandalism. By allowing FHA buyers to purchase homes owned for less than 90 days, properties can be resold as quickly as possible, which will in turn help stabilize real estate prices and revitalize neighborhoods and communities.

But this is not enough. Never has there been a stronger need for creative strategies from those tasked with helping clients manage the REO market and maximize the return on their investments-especially in light of the glut of rundown properties plagued by any number of issues that have the potential to hamper marketing efforts and hinder successful sales.

Traditionally, the rehabilitation alternative has generally been reserved only for those properties that are in the higher price ranges or are severely damaged, below code, or far below comparable (competing market) quality. The rehab option has been limited largely because lenders have not had an easy, consistent, and cost-effective means to rehabilitate their properties in any great quantity. In this housing environment, lenders need to have options available to them to improve the return on their portfolio.

*REMODELS = RESALES*

According to an independent study conducted by Field Asset Services (FAS), a foreclosed property that undergoes remodeling, or rehab, has a much greater chance of resale performance than a property that is not remodeled. Out of the 8,200 properties tracked across 13 states, the average days on market (DOM) for a property without rehabilitation was 154.4 days, compared with just 70.4 days for the properties that were rehabilitated-a dramatic 54.6 percent reduction.

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Undertaking a remodeling project can seem daunting for investors, especially if they have multiple properties they are trying to manage. There are firms that offer services to help investors manage the process, but there are certain elements and strategies that should be considered when searching for a services firm to help with a rehabilitation project.

Rehabilitation is a powerful way for portfolio managers to accelerate the recovery on their REO properties. When done properly, remodeling and rehabilitation services can dramatically reduce expenses and minimize project duration, providing the maximum amount of return in the shortest time frame possible. Here are some things to consider when choosing a services firm to take on a rehab project.

*QUALITY AND CONTROL*

Every rehab project is going to be different depending on location, size, degree of damage, etc. But every project needs to happen quickly with the highest degree of quality and control. To ensure this happens, service firms should provide all the information about the potential rehab upfront, including potential costs and benefits based on code requirements and the investor's parameters. The final plan should be specific to the property in question, not generic with the ability to be applied to any property. This ensures the seller is getting a plan tailored for their unique needs and project.

While creating a comprehensive plan is important to the success of a remodeling project, consistent management is vital. There should be a team of professionals available 24/7 to oversee every detail of the project. Anything can go wrong, and every misstep is one more day the property sits on the market. Ensuring the highest quality in every aspect of the project is critical, and having quality control experts on hand will go a long way to ensuring the successful completion of the rehab and a quick sale.

Constant and consistent visibility in every step of the process-including project status, dates, and costs-is imperative. This provides peace of mind that the project is on time, the team is meeting key milestones, and the investor will be able to gain a return on their property. This team should also be neutral and independent and provide direct, onsite reports of the remodeling progress and completion.

*FLEXIBILITY AND CUSTOMIZATION*

Since no two properties are identical and each situation requires a unique solution, it's important to identify and work with a services firm that understands this and can provide flexibility and customization to each project. Typically, projects fall into three tiers: good, better, and best. As a result, the plan should reflect one of these tiers as determined by the investor, including custom pricing, market profile, and approach.

*GIVE GREEN A GO*

While not a requirement, it's becoming more commonplace to at least investigate and consider green options in a renovation project. A service firm should present sustainable-minded alternatives; then it is ultimately the investor's decision on whether to implement them or not. While many perceive environmentally conscious options as expensive, greening a home can be within budget and create additional buyer appeal.

The green mantra of ""reduce, reuse, and recycle"" can be applied to most rehab projects. For example, kitchen cabinets may not need to be entirely replaced. Maybe just purchasing new doors would suffice, or there may be existing cabinets from another room in the house that can be repurposed. Also, instead of bringing old appliances to the landfill, donate them to an organization like Habitat for Humanity.

Choosing green products is another option. Energy Star-qualified appliances, windows, and lighting are a great alternative to traditional options and are usually comparable in price. Nontoxic paints, tankless water heaters, and low-flush toilets are also eco-aware options that are easy on the rehab budget and the environment .

Although many market-related renovations still remain elusive, thankfully, the ""fix"" for many foreclosures remains firmly within reach. A well-thought-out and focused REO rehabilitation project can accelerate an investor's return on improvement dollars and maximize the rate of return on the property. Clearly, the decision to remodel and rehab is largely a financial one, but choosing the right service firm to help is imperative. Because while we might not be able to patch up the majority of today's economic problems, an efficient and focused rehab plan that maximizes resale performance is a great start at restoring the market to health.