From “Stop Loss” to “Start Recovery”

Patrick Vedra
July 6, 2010 | COMMENTS

Bankers may be their own worst enemies when it comes to maximizing return on non-performing real estate developments and real-estate-owned (REO) or foreclosed properties.

Why? Because the key to REO success is thinking like an owner, not like a lender. Lenders usually are focused on monetizing a property's current value; owners look for ways to enhance value.

Changing your mindset from lender to owner may be challenging, but doing so can help increase an REO development's value by 20% or more, based on our experience on numerous projects. The shift from a “stop loss” to a “start recovery” strategy involves four basic steps:

1. Take charge of the property immediately to begin managing it. Move quickly to reduce risk and build goodwill with the relevant stakeholders. Waiting even a week to take charge of a non-performing real estate development can exponentially increase losses, risk, and liability.
2. Collect as much information about the property as soon as you can. Ignorance is extremely costly when managing a non-performing real estate development. Yet many asset managers who become reluctant owners initially have very limited information about the property.
3. Make changes necessary to adapt the property to current market conditions. The goodwill you establish when you take possession of a property can make all the difference. Local government officials may be more inclined to cooperate with lenders whom they perceive as concerned for a development's long-term impact.
4. Uncover “hidden obligations” of the previous owner, who may have entered into complex multi-party agreements with owners of adjacent developments and/or local governments. While you may be several parties removed from the original agreements, you still “own” their obligations. Investigate any obligations that affect your property and flag them for potential buyers.

Taking these four steps will go far toward maximizing the bank's eventual recovery on the foreclosed property.

This is an executive summary from a much more detailed article by Patrick Vedra, managing director of Dallas-based Carwin Advisors, a real estate restructuring firm. Read the complete article online here.