The Fed’s new REO rental policy
Banks are now permitted to rent their residential real estate owned properties (REOs) — in banker vernacular, other real estate owned properties (OREOs). They can do so for five to ten years before they have to sell them and report their losses, as allowed by the Federal Reserve (Fed).
Currently, regulators monitor a lender’s management of REO properties, including the length of time which they may own REOs, their marketing and sales practices for REOs and lender accounting for portfolio losses. Now, the list will include the rental of these properties if the lender decides it is not the time to sell, but instead rent and defer the reporting of losses. However, lenders must make a “good faith effort” to sell REOs within the five-year disposal window after acquiring the property.
Lenders who choose to rent REO properties must create and document their rental management policies, to include:
- criteria for qualifying an REO as a rental property;
- hiring requirements for employing a broker as a property manager; and
- bank policies crafted in compliance with all laws, in particular landlord/tenant law.
Meet your new client
Brokers who perform property management services just found a new sector of clients: lenders who own foreclosed (REO) properties in their area. The business of banks is lending and accounting. Number crunchers, as lenders are, do not rent, market or sell real estate. The REO property which lenders now find on their books in lieu of trust deed notes (mortgages) is foreign territory.
Lenders need experts to help them conduct their business, and this time it is not an appraiser, credit analyst, mortgage loan officer (MLO) or provider of other outsourced lending decisions. Enter the enterprising broker with property management skills.
As California’s statewide homeownership rate fell from nearly 60% in 2005 to 55% in 2011, rental vacancies also declined from over 7% in 2009 to 6% in 2011, little more than typical turnover vacancy. Since logic dictates brokers must follow the money, they must look to additional properties to lease out as a source of income for the time, effort and talent they invest in their brokerage operation.
The time-honored strategy for reaching out to this fresh source of new business is to approach persons of influence or authority at your local community bank(s) such as stock holders, directors or officers. If you have inside connections, use them! Bankers, whether local or sitting on Wall Street, understand and respect the confidence of those connected individuals.
Present yourself as:
- an experienced and formidable property manager for the analysis and rental/leasing of their REOs; and
- an expert at selling real estate when those rentals are vacant.
Direct the lender’s attention to the mathematics for earning a net operating income from renting the REOs. That income will probably exceed any interest rate yield generated by the lender selling the REO today and reinvesting the net sales proceeds into new mortgages. [See first tuesday Form 550 and first tuesday Form 554.]
Further, prices will move up a bit within the REO’s five-year window for resale, eliminating some of the loss. Also of importance to lenders is the benefit they receive by renting the REO and deferring any losses until it is sold.
During the five-year window, brokers and their agents can easily fill these properties due simply to the increasing demand for rentals over ownership, then market the REOs for sale when they are vacant. This is a worry-free scenario for lenders, since they have only to hire real estate agents to pull in juicy rental income, defer reporting their losses, increase their profit from the property’s resale by laying low until the market rebounds, and (best of all) comply with the new Fed rules which encourage bankers to use brokers as property managers.
Agents: get inside the banker’s head. Tell him exactly how paying 8% to 10% for your services will benefit his bank, but a word to the wise — don’t reveal your whole hand. Your goal is not to teach lenders to manage their REO properties, but to enlighten them as to the necessity of employing you to do all the work.
Your place in the starfish puzzle
You are the one who will manage the REO until it is eventually sold. It is you who will take all necessary steps to cover the risks of landlording — from acquiring proper insurance coverage, to effecting any evictions — while maintaining monthly statements accompanied by your trust account check for the net operating income. You must eliminate a banker’s fear of the unknown by knowing the business for him.
You are part of the solution of the starfish puzzle as we come out of real estate’s Lesser Depression, growing the broken market in a new and uncertain direction. Don’t sit on your license and trust the next boom to make your profit. Shake a nickel bush when you find one, and be part of the shifting direction of brokerage.