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» —Christopher J. Crippen, US Residential Asset Fund more seamlessly together and offers the added benefit of raising comfort levels enough to entrust a third party to take over fundamental responsibilities while holding properties to industry and community standards. In addition to traditional maintenance issues facing REOs, Hicks notes that often these properties require "above and beyond" repairs in order to compete in the crowded marketplace. "To be successful at rental properties, you need to be at the top of the rental market, but that is usually different than a retail market … [properties] do much better when [asset management companies] spend a little bit more on them before renting, so there is less maintenance on the backside of it," Hicks explained. POINT— COUNTERPOINT now you have the additional human element of the person who calls that property home who needs to have open lines of communication for routine maintenance, for repair items, or anything that may come up at that property," Mosley said. An important part of keeping the lines of communication open is ensuring properties meet local municipal requirements and are kept up to code. Matthew Fulton, chairman of Market Ready, a property preservation and rehabilitation firm, has faced this challenge firsthand. "We are a … contractor for both of the GSEs and multiple asset management firms, community banks, and a variety of other lending scenarios. Every home that is purchased has a unique homeowner and specific guidelines," Fulton said. "In some communities, it's a large HOA [homeowners association] with unique building codes that have to be met regarding the exterior colors, how the property is maintained, or what they'll allow with grass levels, etc. I believe that investors in this space truly need boots on the ground (i.e., folks who have worked in the local markets … and can make sure there are no mistakes that could end up being costly)," and ultimately wiping out any ROI the investor hoped to achieve, Fulton explained. Deane agrees and has found that partnering with local contractors can help investors achieve this "boots on the ground" approach. However, managing local networks can be a complicated process in itself, so Deane advises choosing partners wisely and working with an experienced property manager whose sole business is tenant relations and rental operations. In order to ensure industry partners work with the utmost professionalism, Deane advises putting them through a rigorous selection and approval process. "They have to provide all of their licensing, insurance, and then we do regular scorecard performance on our property managers," Deane said. This type of formalized training helps both the investor and their partners work MARKET PULSE While some investors may be familiar with property rehab and upkeep in terms of readying an REO for sale, renting out a foreclosed home involves a greater level of commitment than some owners may be prepared to give; in which case, it pays to enlist the work of a qualified, market-familiar property preservation company. As an added value component, once the work is done and the renter is moved in, many service providers can transition to the tenant's first line of contact for issues such as maintenance repairs and rent collection. Lang has noticed a similar disconnect between owners' expectations and the reality of getting properties move-in ready. "There is a lot more capital investment needed to bring properties up to rental condition as opposed to REO [resale condition]," she said. "With traditional REO sales, we are used to just slapping a couple coats of paint on it, putting carpet in, and that's essentially it. It's a lot different for the REO-to-rental market and it's a huge, huge learning curve." In order to adapt to this added and foreign business aspect, Chad Mosley, SVP of business development at Mortgage Contracting Services (MCS), has found communication is key. "In addition to a normal property, where there is a lot of communication between the servicer, the investor, the field services company, and the asset disposition company or real estate agent, "Single-family rental as the new asset class in the commercial division has a lot of potential. It fills a missing gap in the multifamily-rate portfolios." INDUSTRY INSIGHT Implementing a Rehab Plan COVER STORY While not all renters will elect to own down the line, many investors at least want to fill their properties with serious renters who will help maintain the value of the asset. Because of the cost associated with "refreshing" the property between renters and other hidden expenses, a good strategy is to attract renters looking for long-term rental terms. "Institutional investors figured out pretty quickly that if they could rent out [their REOs] and hold on to them until the market turned around, they could probably make some money," explained Cheryl Lang, CEO and president of Integrated Mortgage Solutions (IMS). As far as long-term outlook, Lang sees investors these days holding properties for five to 10 years before flipping them. "They are buying and holding and looking to the rental income to offset a lot of the expenses," Lang said. VISIT US ONLINE @ DSNEWS.COM An Ever-Evolving Marketplace In the end, whether REO rental is a market in which you would like to do business for the long term or just reap its short-term benefits, it is an ever-present reminder that the REO market is an evolving animal. Capitalizing on the opportunities it presents is akin to taming a wild beast. The REO-to-rental model represents a form of investment that offers unique challenges and unique rewards. The ultimate return on the investment depends heavily on obtaining assets that will be sustainable within their local geographic and demographic markets and maintaining that value with a model that allows the investor to meet the standards required by local law as well as the expectations of tenants. This asset class has many idiosyncrasies, and success depends on a combination of strategy, logistics, and relationships with third parties who will be relied on to fill certain roles in the process. REO-to-rental is a new chapter for the industry in the post-crisis era. And though the chapter may be cut short due to the sheer dynamics of the current marketplace, those with their foot in the door may just find it holds a fairytale ending of steady returns if they can put the right characters into place and properly execute the plotline to capitalize on the intrinsic shift in homeowner and renter populations. 53