Many have been asking for years now, what are the lenders going to do with all those foreclosed homes? Well, in an effort to help the housing market healing process, one small lender has come up with a good answer. Guernsey Bank has decided to begin fixing up their foreclosures and rent them out to tenants until the find qualified buyers.
Many people are thinking that this is a simple idea that shouldn’t have taken much thought to execute. But, in the foreclosure world, this idea is revolutionary.
Lenders Losing Money
Lenders are not in the business of stacking up racks of real estate inventory. They make their money by providing mortgage loans and collecting on the mortgage payments. When they’re forced to foreclosure on a home, they would love to resell it immediately. But, after the long, tedious foreclosure process is finally complete, the property has usually been sitting vacant for a period of time. The banks usually sell these properties in as-is conditions to the highest bidder. These bids are often nowhere near what the foreclosed owner owed on the mortgage.
Robert Patrella, President of Guernsey Bank decided a few years ago that there has to be a more lucrative way for lenders to recoup their loses with foreclosures. Mind you, Patrella is not your typical bank president. He made the press about a decade ago for the way he handled a bank robber. This courageous executive whacked the robber with one of the lobby chairs during the midst of the robbery. Patrella is the bank’s sole shareholder, who treats his customers more like family and friends. The bank lobby has a living room type atmosphere, where customers are invited to hang around during banking hours. They’re treated with Guernsey-brand coffee and Guernsey-brand ice cream while they watch TV and read newspapers. These things are all proof the Guernsey bank does things differently than most banks.
That’s why many were not surprised when Patrella decided to take a monumental approach when it comes to investment property his bank has foreclosed on.
Foreclosed Need Fixing Up
Guernsey Bank sells conventional mortgages for homes that will be owner-occupied. By the end of the foreclosure process, he found that many of the homes were trashed. Their conditions decreased the values even more than the low market values dictated. He just didn’t find it to be lucrative to sell these foreclosed home for half of what the previously owned their bank for the mortgage loan.
Instead, Guernsey Bank began fixing up the homes, usually spending anywhere between $10,000 and $50,000 to rehab each one. Then, they located reliable tenants and began collecting rents on the foreclosures until they could find qualified buyers for them.
Occupants Secure the Homes
As many banks and lenders will proclaim, the best way to ensure the security of a real estate property is to have someone living in it. This cuts down on damages related to looting, vandalism and squatters. It also helps to maintain the integrity of fixtures, electrical systems, plumbing and other systems that must be used regularly in order to continue working properly.
The bank’s decision to rent out foreclosures is a big step in many directions. Having people in the homes is better for the structures, the neighborhoods where the foreclosures are located, as well as the banks themselves. Even when you consider the costs for the repairs and upgrades, the choice is much more lucrative than they way banks have typically handled foreclosures. They get to collect rental payments while they seek out qualified buyers. The property value is increased by the rehab. And, in time, when housing prices increase, they can sell the property for a much higher profit.
And, keeping with the Guernsey Bank way of making customers feel comfortable, the tenants are treated just as well as bank customers. Patrella has started a new department in his bank that manages all of the rental properties. This property management team also includes a maintenance man who works full-time hours to maintain the properties. The tenants are assured that maintenance requests will be addressed within a reasonable amount of time, with professionalism and courtesy.
Bank Regulators Don’t Agree
If you’re thinking that these new procedures are making larger banks look bad, you’re not alone. Federal bank auditors have gotten in the habit of routinely bashing Guernsey for his revolutionary foreclosure handling procedures. This new way of doing things seems to be making the regulators very uncomfortable. Their only concern is getting foreclosed properties off of the books of the banks. To regulators, this means “sell it and move on.”
According to Patrella, Guernsey has assets totaling $135 million. Their current home inventory is only about $1 million. So, he has no worries about the inventory taking over too much of the bank’s balance sheet. And, as the economy continues to improve in the US, Patrella says, “I’m more hopeful now than I’ve ever been.”
Similar Moves by Others
Earlier this year, Bank of America made a similar move with their “Mortgage to Lease Programs.” This program allowed 1,000 distressed homeowners to remain in their homes after foreclosure by leasing the homes from BofA.
And, in 2011, Rick Sharga, VP of Carrington Executive spoke on how the housing market could benefit from renting out foreclosures. At the time, FHA owned 200,000 foreclosed homes that were just sitting, vacant, while people scrambled across the country to find valuable rentals for their families. Watch the attached video for more details.