One of the biggest blind spots of regional and national lenders is gaining intimate knowledge of a particular market. There are a host of data providers that may enable someone to make a very informed guess of what a local market is doing, but without knowing, truly knowing, all the forces at play in a market, they remain largely blind. The power of presence gives first hand knowledge.
We believe our ground-engaged partners, whether agents, tradesmen, employees, or other service providers, know their markets. They know the crime concentrations, superfund sites, rail spurs, neighborhood appearances, and market efficiency that may not be reportable by national agencies. They see order through chaos of data. They are the pulse of a market.
In this distressed real estate market, most companies are flocking to the Big Banks (and the FDIC) hoping to “land the whale”. This has left the smaller / regional lenders without a viable solution.
Whether you have 15 REO, or 1,500 REO, the need is the same. Terranova is focused on providing quality and prompt service to all our clients and lending our network and expertise to each of our clients’ assets.
It’s easy to become desensitized in this business. The term Asset is used interchangeable with house, but the term Home is rarely used.
With this in mind, TRC works with their clients, their agents and their service providers to define how to market an asset as someone’s home. It may be as simple as landscape, as intricate as a built-in hutch, or as visible as a pool table, it’s the locally inspired personal touches that differentiate an asset from someone’s Home.
Exceptions of course apply here depending on our clients’ needs. Many lenders today are under pressure to liquidate assets. Although this pressure can be met by a lucky end buyer in the right place at the right time, what typically happens is speculators step in and develop their own inventory to sell out at a profit.
TRC has experience in residential marketing as well as bulk institutional asset sales and recognized the differences in all sales occasions.
While lenders view performing real estate loans as homogenous, the homogeneity evaporates the moment a loan becomes non-performing. Similarly, once a lender takes back a property, the disposition of the collateral requires a heterogeneous approach.
A three bedroom, two bath home in Scottsdale will have a different marketing plan than a three bedroom, two bath home in Tempe. Although nearly adjacent in location, the end buyer in these markets can be far from similar.
The three dimensional matrix driving most marketing strategies is a combination of property condition, location, and underlying market forces (supply and demand). Terranova works with their clients to understand their portfolio strategy, then directs its resources to navigate through the matrix to optimize the end result. Sometimes this can be as simple as lowering the price, other times this can be as complicated as obtaining a variance and converting the property to another use to optimize sale price.
Too often the strategy is “list & sell”. This results in a MLS entry and a sign in the front yard – but typically no urgency. Terranova's experience is that unless the listing agent is encouraged to actually sell the property – little action is proactively taken to sell the home.
Developing a portfolio strategy can be as simple as list low and sell fast or as complicated as a proprietary pricing algorithm contemplating layers of data such as the lenders “book” value, surrounding supply and pricing trends. Terranova can execute any strategy, or we can collaboratively develop the strategy with our clients.
On a local level, many forces come into play when developing a pricing strategy. Variables include a clients’ willingness to invest to optimize sales price, surrounding inventory of “like properties” trends of “days on market” vs. the gap trend of ask vs. sale prices, and evidence of pent up demand for slightly different properties.
Prior to forming Terranova, the Principals interviewed builders, developers, bankers/lenders and asset management executives (inclusive of loan workout, asset valuation, and liquidation functions). National lenders, especially those with centralized operations, take pride in the belief that they “know” what is going on in all their markets and develop complex data models and make educated guesses on the value of their assets.
There are two flaws in these efforts: 1) National data providers typically miss the pulse of a local market, 2) these complex models typically do a great job in guessing today’s asset value, but they largely miss what that asset will be worth in 3-6 months.
Further, what can be considered as the most valuable data is NOT available on a national subscription: MLS. It is Terranova's belief that the acid test of a market can be evaluated with MLS data:
§ 12 month trend of ask price
§ 12 month trend of sale price
§ 12 month trend of days on market
§ 12 month trend of “like” inventory”
§ 12 month trend of “like” sales
Consider the two below graphs illustrating ask vs. sale prices and days on market… which graph suggests that the market is ripe to absorb another home, vs suggest that the home needs some degree of differentiation?
The above data tells volumes about a market. This data isn’t available nationally with any reliable structure. This comes from local agents, local MLS and reflects local conditions.
Terranova combines the needs of lenders out of a market with the data and information available inside of a market to work with their clients to develop an optimal disposition strategy.
Real estate owned is a non performing asset. What makes it unique from a non performing loan is that the loan does not require maintenance, get vandalized, or get taxed. The addition of expenses with REO causes most to want to liquidate their REO, to drop the price until they “find the market” operating with the assumption that a sale will occur at a price lower than current list price.
Traditional practice has been to start near the top of the market, then lower the ask price of an asset in an effort to find the market. While this may minimize marketing time, it may also forgo opportunity to maximize sale value. Many properties have latent value that can be tapped with minimal effort.
What if the market is above the current list price? What if the market is at the same price but with different property features?
For example, an older 3 bedroom / 2 bath home in Southern Michigan was deemed nearly valueless by the lender. It was listed for sale at $79,000 – as is – with no offers over a 6 month period. When the asset manager contacted the listing agent they learned that the property is 3 acres, and surrounding properties are less than 1 acre. Further research indicated that the home was situated on an area of the property that allowed for subdivision into three lots with the home remaining on one of them. It was decided to further reduce the list price to $54,000, and list the newly subdivided adjacent lots for $19,000 each. Upon full disposition, the lender netted more than they would have by simply selling the home at a reduced price.
By analyzing all features of not only the subject property, but comparing them to features of what is selling, simple decisions can be made to increase sale price.
Are some properties un-sellable? Yes – there are instances where the improvements are so poor that they imply negative land value. Just because something cannot be sold, does not mean that it cannot be disposed of. Additionally, there are instances where sale may not be the optimum disposition. Some properties can be leased to provide positive cash flow while covering management fees. Lastly, where tenants demonstrate stable rents, there may exist an opportunity to seller-finance the sale (granted this becomes a loan to facilitate the disposition of REO) and eventually sell the note.