Managing And Marketing Foreclosed Properties - A Banker’s Guide

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.

The lender must examine and truly understand both the regional laws of foreclosure, and the documents for the specific loan at hand.   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.At times, a bank not foreclosing at the right time may result in a long postponement, causing more arrearages to accrue and possible deterioration of the collateral property.

Once the foreclosure decision is made, the bank needs to automatically involve its foreclosed property department.  In a commercial bank, foreclosed real estate properties are referred to as Other Real Estate Owned, or “OREO,” as distinct from real estate owned and used in the operation of the bank, such as the main bank building and bank branch properties.  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 homes and buildings lost to fires when there wasn’t insurance coverage, due to sloppiness in monitoring the transition.)
• Assign the responsibility for managing foreclosed properties to one person.If the foreclosure volume is sufficient to occupy one or more people fulltime, then naturally you will need to hire someone fulltime for this project.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 beneficial to have some “space” between the OREO/REO managers and the borrowers of the loan.
• Have the properties secured immediately after either foreclosure or abandonment.Keep 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.  No prospective purchaser wants to buy a problem property or a property that looks bad.
• 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 OREO or REO department will know more about the property than any real estate agent, and your financing to the purchaser will be a major selling point.You are the one to control the financing, not the a real estate agent.
• Chat with the neighbors who live near the property.The homeowner’s family and friends can often become 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 helpful financing to persuade purchasers to jump on the deal.Keep in mind that the sooner you make a sale, the sooner the property can make money back instead of spending 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.
• Review OREO / REO activities at meetings of the Board of Directors.  Directors often have market knowledge and contacts that can help with OREO / REO problems.

Obviously, this list of items is a lot to think about.  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, consultant, and banking regulator, has successfully managed hundreds of millions of dollars of distressed and foreclosed properties including single-family houses, condominiums, subdivisions and land developments, apartments, office buildings, and many others nationwide.  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.