When the U.S. real estate market collapsed in 2007, it not only triggered a recession and stock market crash, but it also sent nearly 9.3 million American homeowners into foreclosure. A decade later, while the number of foreclosed properties has steadily declined, it remains elevated in some areas of the nation, especially in the Midwest and a handful of judicial foreclosure states like New York, New Jersey and Illinois, according to ATTOM Data Solutions. While in many respects the worst is now behind us, the reality is that the problem persists, with more than 930,000 properties currently in foreclosure or REO nationwide.
Distressed homes actively in foreclosure, or under management as REO, create significant pressure on local neighborhoods. The blight that arises from neglect is considerably better today than in the past, but blight associated with bank-owned, distressed homes persists, nevertheless. According to Aaron Klein, former Treasury Deputy Assistant Secretary for Economic Policy, vacant properties reduce the property value of surrounding homes, increase crime and reduce the tax base for local government.
“Under a conservative set of assumptions, a vacant property causes losses of approximately $150,000 in the first year: $133,000 from reduced property value for its neighbors, $14,000 in increased crime and $1,500 in increased costs for police and fire departments,” wrote Klein in a recent report, Understanding the True Costs of Abandoned Properties.
The negative, neighborhood-level impact of distressed homes runs directly counter to the central mission of many of the industry’s dynamic companies and talented individuals who believe and support the fact that homeownership is integral to the American dream. These businesses are literally built on the creation and preservation of homeownership opportunities. They work hard to lessen the impact of distressed homes within a community – traditionally by investing significant amounts of both time and money toward repairing these homes and focusing on preservation and property management – with the intent of converting (or “flipping”) distressed homes into homeownership opportunities for owner occupants or first-time homebuyers. However, this traditional industry approach often prolongs the time that assets stay distressed and/or vacant, which results in increased risk for neighborhood destabilization, crime or blight.
Jason Allnutt, General Manager for Auction.com, believes that the partnership that exists between Auction.com and many leading REO departments provides a better approach. Rather than rely on a traditional retail strategy, REO departments can effectively avoid the negative impact and blight that distressed properties can cause by aggressively marketing those properties through an alternative disposition strategy that leverages the power of an online auction.
A Proven Strategy with Multiple Benefits
Banks, lending institutions, and government agencies are focused on supporting homeownership, but in many ways, the traditional system currently in place is not aligned with that mission. In fact, as it exists today, it often exposes these parties to significant risks – ranging from financial, to operational and regulatory – that the Auction.com marketplace has been designed to address.
Every time a distressed home is ‘acquired’ by an institution through foreclosure, it takes on financial risk through the loss associated with a home value that is below the loan amount, along with selling costs and holding costs like eviction, maintenance, repairs, taxes, insurance, etc. Allnutt explains how Auction.com addresses financial risk, “rather than establishing a list price, our clients establish a net reserve. That reserve reflects their estimated net proceeds from a traditional REO outcome (expected gross sales price minus expected holding and selling expenses). If a reserve is correctly calculated, 80% of the time we can find a buyer at the foreclosure sale, or in an online auction the day after the foreclosure sale. On average we will sell homes for 10% greater than that traditional REO net outcome.”
Allnutt continues, “All of this happens in significantly less time than it takes a traditional retail REO process, and that reduced timeline correlates directly to a massive reduction in neighborhood blight. This is the very definition of community stabilization as those communities most impacted experience lower levels of distressed inventory and the associated negative impacts are mitigated as well.”
Additionally, there is a corresponding reduction in operational and regulatory risks for institutions when they are not holding large inventories of homes. This allows the institutions to instead focus their energy on the core business initiatives of lending and allows them to move away from the management of large REO inventories.
Perhaps most importantly, by matching occupied properties to buyers who will often pay a premium for occupied properties, the bank avoids the human impact and reputational risk associated with evictions. Allnutt added, “We have several clients who have adopted a zero eviction goal, to sell 100% of their occupied homes to investor owners.” In many cases, Auction.com sees the new buyers immediately rent the home back to the former borrower or current occupant, so it often protects the families that are already living in the home.
Jeff Bell, head of strategic planning for Auction.com indicates that “nearly 40% of our homes sold occupied resulted in the buyer leasing the home to the current occupant.”