Adopting A Strategic Asset Management Philosophy
Achieving Optimal Execution on Investment Return or Recovery
By Ryan Hennessy
Success in managing a real estate portfolio is traditionally measured by return on investment or loss recovery. While these measurements can be easily calculated, to truly maximize them requires a comprehensive understanding of critical inputs, the impact of controllable and uncontrollable variables, and prioritizing the decisions that are more crucial to the management or liquidation strategy.
Recent history has shown that interest rates hit modern lows and property values rapidly appreciate driven by an extremely aggressive buyer’s pool, amidst a global health pandemic. As we enter a new real estate cycle, we are currently experiencing a cooler real estate market impacted by declines in new purchase loan originations and refinances, and inflation, as the word “recession” continues to be utilized when classifying the state of the economy.
As these trends often align with additional opportunity within the real estate owned (REO) and distressed real estate asset classes, adopting a strategic asset management philosophy is imperative.
Two Types of Portfolio Owners
Portfolio owners can often be classified into one of two categories: those where their strategy dictates their portfolio and those where their portfolio dictates their strategy.
The former is often comprised of those with a hyper-focused management strategy within a few key market areas. The strategy box dictates the portfolio as very rarely will an asset be acquired that falls outside of the investment objective.
The latter to the aforementioned is often comprised of those with a more global strategy, either investing in national pools of assets or mortgage debt, or financial institutions servicing mortgage debt related to delinquent loans. In this instance, assets will enter the portfolio in various markets with diverse property specifications, condition, and risk or opportunity, requiring a strategy to be determined while the asset is under management and not determined prior to it entering a management or owned status.
The paradox of these types of portfolio owners is that they each strive to be the other. Those with a more concentrated strategy often aspire to expand, be it geography, property type or both, while those with a more global approach aspire to have a more local approach as to further maximize opportunity.
The Critical Inputs
While advancements in technology have made data more attainable and resources more tangible, identifying strategies at an asset level, as well as key drivers that may require a pivot, is not an automated process. As such, maximizing opportunity or mitigating risk requires a flexible process driven by four critical property-level inputs: occupancy, value, intangibles, and geography.
Occupancy
While the essential data point is tied to status – occupied, occupied by possession, or vacant – leveraging data to better assess the cost implications is a key component of a strategic approach. Through example, a best practice approach when geographically applicable, is to understand projected costs that may be incurred when considering an eviction as this will help determine a breakeven amount to leverage as an offering for relocation assistance (cash for keys).
This can be determined by aggregating cost data surrounding state-based attorney fees, trash out/debris removal probability costs, and property taxes incurred during the eviction process based on state-driven timelines. The sum will help determine the relocation assistance vs. eviction breakeven cost to consider within the overall management strategy.
Value
While value is often analyzed during the acquisition due diligence or mortgage servicing phase, valuation tools that are leveraged are derived from a more cost-effective approach, therefore reliant on general market data, or are assigned to a local professional without sharing insight into the use case of the valuation.
In both instances, the impact of a property’s condition on current and potential value is often either unable to be determined or overlooked. Properly assessing all elements that go into determining value, with emphasis on those that can be aggregated through data resources, such as multiple listing service market data, provides the required resource within this variable.
Intangibles
A component often overlooked are the intangible inputs associated with asset management, namely title, taxes and liens. While a property might be in a marketable state desired by targeted buyers, failure to analyze these items can hinder or prevent a sale to a prospective buyer, especially if the buyer is obtaining financing.
Properties acquired via foreclosure sale or assets that migrate to an REO status via foreclosure often have delinquencies or defects associated with them. Building taskings or triggers to obtain title or tax and municipal lien reports will drastically impact management strategy.
Geography
Diversity in geography causes different considerations in asset management, from the impact weather can cause to the prime windows for “selling seasons.” An additional consideration is the velocity geography can bring when leveraging both rental and liquidation strategies. Understanding the forecast of a portfolio, especially those across diverse geographies, will assist in either expanding or narrowing down management options.
As an example, a property located in a one-off market may be ideal for a rental, however, this strategy may not be logical without additional opportunities to bring assets under management in that same geographic.
Effectively aggregating data on the above better supports an asset-level decision, which can include repaired sales, as-is sales, auction, conversion to rental, or alternative disposition methods (deed-away, donation, pools sale, etc.). When managing a real estate portfolio, management strategy determination is the tier-one driver that all other supplemental decisions will be made from.
For example, if marketing a property, determining an initial list price is a crucial decision but determining this is subsequential to the strategy. While the decision to be aggressive or conservative with pricing will impact projecting marketing time, the variance in price between an aggressive and conservative strategy is nominal given the strategy was already determined.
As we enter changes within the real estate market and overall economy, the availability of data, technology platforms and integration with various providers provides information to investors which allows them to make better decision on their portfolio assets while also creating a more competitive market. Ensuring proper management of the four critical inputs to adopt and implement the most effective management solution will help drive optimal execution on investment return or recovery.
