Home / Focus / Banking and Finance August 2011 / Banks as tenants: Cleaning and maintaining foreclosed properties bad for banks, good for specialists

Banks as tenants: Cleaning and maintaining foreclosed properties bad for banks, good for specialists

The kitchen in a bank-owned Queen Creek home that was once shared by 15 people and four cats. The property will require a full clean-up and ongoing maintenance until the bank can sell it to a new owner. (Photo courtesy of Arizona Realty Asset Preservation)

Contractor Brian Hazlett and his two-man crew spent three solid days removing clothes with the stench of animal feces and rotting food from a powerless refrigerator in a bank-owned residential property in Queen Creek.

For Hazlett and his colleagues at Arizona Realty Asset Preservation, much more needs to be done on the home previously occupied by 15 people and four cats. He has placed a bid to fence in the pool and spa according to city codes. He will also maintain the landscaping until the property sells.

“I have a lot of work. I work seven days a week,” says Hazlett, 47, who inspects at least 50 properties per week statewide for lenders.

The time, effort and money required to upkeep a home that normally would have been put in by the homeowner shifts to the bank. Lenders have to pay to clean up their sometimes-trashed properties to get them ready to sell. These properties, which will sell at a drastically lower price than when they were new, are putting a great strain on those institutions’ profitability, which affects their ability to make new loans.

Estimates on the average cost to the economy to preserve a property and get it ready for the market vary wildly. A report from Congress’ Joint Economic Committee puts the amount at up to $80,000 while foreclosure listing website RealtyTrac.com puts the amount at up to $225,000.

To combat this financial problem, lenders are now allowing delinquent borrowers to stay in their properties until the home is resold, says Gregg Thorell, 42, director of residential lending for Pinnacle Bank in Scottsdale.

It works out as a better deal for the lender, which accepts the loss when the borrower sells short of the original loan amount, but it saves itself the money on maintaining the home because the borrower is doing that better than the bank could, Thorell says.

“I don’t want to hold it because the longer I hold it the more it costs me,” he says.

The situation is already improving, Thorell says, citing that during the past two months more than 17,000 Arizona bank-owned properties have been sold, helping to dry up the foreclosed inventory and reducing lenders’ costs.

Some banks are taking a far more drastic approach to deal with a glut of low-value residential properties that are unlikely to ever be worth the cost of upkeep.

Bank of America announced this month that in Cleveland it would demolish 100 homes below $10,000 in value that would be too costly to repair and donate the  land to the city in order to relive itself of all costs associated with owning the properties. In addition to reducing its cost of maintaining the homes, each land donation is a write-off for the bank.

Could that happen in Arizona? Sen. John McComish, R-Phoenix, chairman of the Senate Banking and Insurance Committee, doesn’t think so.

“I am aware of the Cleveland issue. That city and my hometown of Youngstown, Ohio, have been bulldozing blighted homes — and entire neighborhoods — that have been abandoned and have reverted to city ownership. The theory is that the neighborhoods are unlikely to make a comeback and it is cheaper to bulldoze and plant grass than it is to patrol the areas and try to keep the homes from falling down.

“I suspect that the banks came to a similar conclusion and tied in with what the cities were already doing.  Here in Arizona we don’t have the same kind of blighted slum issues that they have in the rust belt, so I don’t see anything so dramatic happening here,” McComish says.

Nevertheless, the cost of managing, inspecting and repairing bank-owned properties continues to be a major concern for lenders.

Candace Wiest, president and CEO of West Valley National Bank in Avondale, says once the bank becomes the property owner, in addition to getting the home in ready-to-sell condition, it also bears the costs of maintaining the house even after it’s clean.

“You have to pay insurance, property tax and very often when we get this property back in general — throughout my career — it requires deferred maintenance,” says Wiest, who served on the Federal Reserve Board in San Francisco for six years before taking over West Valley National Bank.

There is an income stream from these properties for contractors who do the work and for thieves who steal appliances and other items from vacant homes.

On the legal side, contractors and property preservation specialists have been working on upkeep of these properties since the beginning of the real estate crash in October 2007.

Property preservation experts say it is difficult to place a per-house cost of maintaining foreclosed properties because there are several variables that figure into the cost. Lenders pay for repairs and maintenance by bid and not by the hour, and most use bid estimating software to streamline the bidding process, ensuring that they are paying standard industry rates to contractors, they say.

“It’s all by the bid and based on what issues need to be addressed by the bank or mortgage company,” Hazlett says.

Hazlett placed a conservative estimate of cutting the grass for a home for a year at about $1,200. Multiply that number by the millions of homes foreclosed nationally and that’s a huge amount of money, he says. In addition, an initial grass cut, when the grass hasn’t been mowed in several months, might cost a bank several hundred dollars.

Hazlett cited other costs including $50 for initially cleaning the inside of a home; $4,000 for replacing a ground-mounted air conditioning unit; $400 to replace and electric hot water heater; and $700 to cover a pool with boards. Some costs can become recurring, like graffiti removal.

Contractor Tom Rietz, owner of Canterra Homes, says he is paid a flat rate of $75 to do an initial inspection of a foreclosed property and $25 to do a re-inspection. He has inspected more than 3,000 properties in Maricopa and Pinal counties this year for the Department of Housing and Urban Development. He averages about 120 inspections per week between the two counties.

“It’s a flat pay schedule that is set on behalf of us. There’s no negotiation.” Rietz says.

On the issue of vandalism and theft, Hazlett says it’s fairly common for ground-mounted air conditioning units to be ripped out and sold as whole units or for parts either by the foreclosed property owner or by thieves who specialize in ripping off vacant properties. Sometimes kitchen cabinets and other valuable fixtures — which by law need to remain with the house — are also missing. Owners or vandals sometimes steal copper piping hot water tanks — especially from older homes — and sell them for scrap.

Lenders by law are responsible for the properties and have to pay for their repair and maintenance until they sell or face code violation fines from cities, experts say.

Rietz has seen just about every kind of neglect and damage that can be imagined.

But he says the majority of these properties are in relatively good condition, which depends heavily on how long they are vacant. The longer they are vacant, the greater the chance that vandals and thieves will strike. During the past ten months, Rietz, 45, has conducted more than 3,000 property inspections and has managed the repair and maintenance of about 800 properties. The majority of the properties he manages, he says, required routine repair and maintenance.

“Ten percent are really bad,” and those are the ones that cost a lot of money to repair, he says.

On top of that, the government and banks often don’t pay top dollar to make repairs, he says.

“Tight margins mean that it’s hard to get a contractor to drive to a property to make a bid,” Rietz says.

Although the state foreclosure rate is dropping — a big relief to lenders  and municipalities — it doesn’t change the fact that lenders tend to be bad homeowners and would rather do what they do best, which is lend money for profit, Thorell says.

“All bank values are hurt because price per shares aren’t what they were. There’s not as much profit,” Thorell says.

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