The asset management firm you hire becomes an extension of your team.
With a dynamic marketplace and property owners succeeding or failing at a rapid pace, public and private lenders could be faced with a burgeoning REO portfolio. And, in many cases, the assets will be geographically distant from lenders, who may shoulder the burden of “what to do next” with the asset.
One of the first decisions to make is whether to retain an REO asset management firm or take on the disposition of owned real estate alone. The right REO asset management firm will give you immediate capability and experience to manage your portfolio. If you choose to hire outside your organization, the crash course presented here reviews a list of requirements you’ll need to cover, either in-house or in a specific scope of work designed from the start of a contract. The firm you engage to manage this process becomes an extension of your special assets department. As such, they are able to save your organization time and workforce requirements. It is important to have your contacts, support system, and template in place when and if an onslaught occurs. Banking or lending experience will be invaluable to ensure the firm supports your understanding of the landscape.
POTENTIAL ASSET SALE ANALYSIS
One alternative to foreclosure can be the sale of one or more problem loans where there is sufficient equity in the collateral to protect against a further write down of the carried asset value. A note sale gives immediate effect to the bank’s classified asset/capital ratio at a write off amount close to what would occur in the REO handling process. Your real estate team, or even the consulting firm, can assist with obtaining offers for the purchase of loans in your portfolio. If this is not the path for your organization, the REO process begins immediately.
ASSET STABILIZATION AND VALUE PRESERVATION
Let’s start from day zero. The property is now in your hands. Be sure to have eyes and boots on-site to conduct an initial property assessment. Damage? Squatters? Imminent safety or security issues?
Make sure the team you have formed can assess the immediate physical needs of the property while an analysis can be completed on value. Your REO management firm should be working furiously in the background while coordinating maintenance, security, and repairs during the first valuable days of holding the property.
Be sure to connect them with a contact at your insurance company, because they’ll be your advocate navigating any fire, flood, or damage claims that won’t have to come directly from your pocket. Foreclosure notification and tracking, cash for keys, and eventual liquidation on the horizon means that many things need to happen, often at the same time. Your firm will keep the process moving with a stable of building inspectors, vetted maintenance vendors, locksmiths, and myriad others so you can focus on the larger picture as a lender. Once the property is secure and stabilized, you can move forward knowing that next steps can occur confidently, despite an unfamiliar location or landscape.
Property preservation? Check. While your boots on the ground stabilize the physical needs of your property, the team should concurrently analyze the value of and begin the slog of research to move forward with the asset. Your management team should have the resources already in place to conduct analyses both locally and in view of nationwide trending.
They will conduct BPOs (broker price opinions) and reconcile them with current appraisal reports. Keep in mind that appraisal execution can be weeks out, so ensure your team can request the service immediately upon acquisition.
While your team sets this in motion, customized reporting on local and national cap rates, sales trends, and comparative properties will be in your hands so you have all the information needed to determine the future of the property. Your decision to move one direction or the other will naturally rely on the depth of knowledge and backup research your firm provides. They can make recommendations on an appropriate brokerage house, property management company, or other service provider. There’s a lot to juggle here, so physical improvements as well as value analysis may go hand in hand. A refresh on a building lobby could add substantial value in a resale, though maintaining the lobby as it came to you could give the next buyer the opportunity for their own TIs.
Your team will work with you to balance the need between building maintenance, repair, and improvement in order to minimize the time you are required to hold the asset and the highest realized return.
Asset stabilized. Check.
Asset value assessment. Check.
Possible sale, possible hold. Now, what to do in the interim? Your REO firm has multiple wheels in motion on your behalf, and while the process continues toward a sale or hold, your team will work toward optimizing the property to ensure the maximum value to your organization. They will carefully qualify tenants and determine lease status.
Renewals can be granted, market rents can be updated, and full optimization of the property and rent rolls can occur while other items operate in the background. Make sure the firm you’ve engaged can qualify your tenant procurement and vet vendors for bonding, licensure, and insurance. Their ability to recommend market-competitive rents as well as fill any vacancies will be an important requirement during the asset’s time in your hands. They’ll adeptly handle any emergent services required with the local plumbing, roofing, or miscellaneous vendor needs. Your organization’s geographic location will not hinder the operational efficiency of this property as long as your firm has the network depth needed in this space. When necessary, they’ll also easily handle any eviction notices, lease terminations, or physical removal of current tenants.
EXPERIENCED ALLY A MUST
The common thread throughout this process is the firm you’ve selected to handle this complex environment. As with any vendor relationship, the experience and trust they engender makes the most successful of relationships.
The REO sphere requires you have an ally, an advocate, a teammate who will go the distance on your behalf. That will not only ensure a successful REO process but also that the firm becomes an adjunct part of your own team, seamlessly weaving together your legal, insurance, financial, and operational aspects. You lead the charge with a full tool belt as they stand ready to support the process while you move through it.
Multiple properties? Multiple issues? Let your firm block and tackle on your behalf while you move the ball down the field.
PREPARATION IS VITAL
In the end, success demands preparation. Dynamic times mean dynamic solutions and opportunity. Prepare your organization early, so you are ready to pivot and flex as these opportunities hit your desk.
Ask colleagues in the industry for success stories (or failures!), formulate a working outline of what you’re looking for, and interview multiple organizations that are able to support at a moment’s notice. Be specific. Don’t hesitate to challenge them with your real-world horror stories, determining whether they align with your organization’s structure and ethos. Know
exactly how their engagement or retainer works, how quickly they can spool up, and how their termination process works if the fit isn’t quite right.
The time for opportunity in REO may be quickly approaching, and we are all the wiser for going in ready and fully armed
ABOUT THE AUTHOR
Gene Buccola is a visionary investor in and manager of high-performing companies in real estate, aviation, alternative energy, construction, interior design, and technology. Together, Buccola and his team of professional partners have a track record of success in commercial real estate repositioning, including REO asset management; bank-owned commercial real estate asset repositioning; asset valuation, preservation, eviction, and stabilization and asset marketing, offer management, negation, and sale. Their private equity investing work includes commercial and residential real estate, alternative energy, and cloud-based technology services. Commercial property management services include property management, asset preservation, asset marketing, offer management, negation, and sale.