What is the distinction between performing and non-performing assets?
Performing assets-results in the property selling for cash or in a new loan to a borrower
Non-performing-a loan or lease that is not meeting its stated principal and interest payments (I.e. Commercial loans 90 days past due or consumer loans 180 days past due).
Non-performing assets don’t produce any income.
What issues should an asset manager focus on when working to convert an REO to either cash or a performing asset?
Buyer apprehension
caveat emptor
demographics and needs of buyers
competing sellers and competing properties
How does an asset manager make a decision to sell a property as-is versus holding it?
The decision is based on an evaluation of market dynamics, strengths and weaknesses of the property, the external financial network, availability of capital, and a potential buyer’s motivations for purchasing the property.
What factors are critical in managing the repositioning of an REO property?
- minimizing expenses and maximizing value by carefully evaluating expenses and increasing occupancy
- timely resolution of deferred maintenance at competitive costs
- completing needed capital improvements and addressing life safety/code violations
- evaluating market conditions, competitive rebid of all major service contracts, new tax assessment
What responsibility does legal counsel have in all the property disposition process?
The most critical hand’s-on responsibility
- drafting or reviewing and commenting on the purchase and sales agreement provided by the buyer
- confirming the title is valid and that there are no clouds which would prevent the seller from transferring the property
- preparing conveyance documents to include the warranty deed.
- amendments to the purchase/sales agreement
- confirming that the deed is recorded with the title/escrow company after closing
Define REO.
Real Estate Owned Property-a non-performing property owned by a lender due to a borrowers default.
Identify three ways REO properties may be acquired by lenders.
Trustee’s sale (non-judicial foreclosure)
judicial foreclosure
through a deed in lieu of foreclosure
What is a lender’s primary objective with an REO?
To convert the asset from non-performing to performing status and /or recover the loan principle through disposition of the asset.
Identify and describe the three critical factors that an asset manager should address when converting an REO property to either cash or to a performing asset.
Buyer apprehension-distressed nature of the property will affect value therefore asset manager must minimize or eliminate problems that characterize it as an REO property.
Caveat emptor-make full disclosures to prospective buyers in writing.
Market conditions
What market factors should an asset manager address to move towards a successful resolution for a troubles property?
Understanding market dynamics because they dictate value and pricing
strengths and weaknesses of the property as well as what is curable and what is not
external financial climate
Provide examples of deferred maintenance items that would need to be addressed for a property to be sold as-is.
HVAC repairs
leaky roof repairs
broken window repairs
all building systems should be working properly
What types of costs are evaluated to determine whether or not it makes sense to sell a property as-is?
Discounted price
repair or improvement allowance to the buyer
closing costs
bonding or insurance policy
Describe the three types of capital improvement projects that mat be the result of a decision to hold a property versus selling as-is.
Remodeling-most economical, least time consuming
Rehabilitation-repairs to all building systems. It restores the building to its look at a point in time.
Renovation-delivers a “new” building as its final product
What critical areas are used to develop a hold/sell analysis?
-Collect market and specific sub-market data on leasing and sales comparables
develop a DCF (discounted cash flow) model which includes lease-up assumptions, operating expenses, capital improvements, and reserves
compare the analysis to the owner objectives
Define DCF
Discounted Cash Flow-a financial analysis tool that gives a present value to an investment and is used for calculating comparable evaluators for investments with future cash flows
It estimate a properties value and cash-on-cash return after improvements and lease-ups.
Define collateral value
The value of an asset pledged as collateral to obtain a loan
What are the primary tasks an asset manager engages in to protect collateral value?
Evaluate security and maintenance insures the property maintain utilities inspect mechanical systems check for hazardous waste
What are the secondary tasks that should be done to protect collateral value?
Secure rents resolve tenant concerns evaluate condition of the property obtain title report obtain architectural plan bid out work
What are the management decisions an asset manager needs to make once a property has been repositioned?
- Find a property manager
- Select a leasing agent
- Develop a marketing schedule and meet with ad agencies
- Evaluate curb appeal
What strategies does an asset manager employ to manage stabilized property successfully?
- Respond quickly to tenants
- Consider placing property manager onsite
- Unused areas should be maintained
- Work with utility companies to lower rates
In marketing a property for sale, what should an asset manager do?
- define the price
- engage a qualified broker
- Define concessions (not disclosure)
- Assemble current rent roll, leases, tenant correspondence files
- Define advertising and promotional events
- Identify most likely buyer profile
What is the role of the broker once terms and conditions of a sale are finalized?
Identifying tenants, sub-contractors, or other related parties of the impending sale
Preparing market surveys, comparable lease data, and demographic reports
Confirming the time and date of closing with the buyer, seller, and others involved
The property manager’s tasks, once the terms and conditions of the sale are defined, focus on what issues?
Advise tenants in change of ownership
Request utilities be pro-rated to the day of closing
Reconcile accounting associated with rent collection
Terminate services and/or notify insurance company or any contractors of change in ownership
Reconcile accounts associated with property after closing
Ensure smooth transition to new owner of property
Define warranty deed
A deed that expressly includes one or more covenants of title
