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June 02, 2014

Competing for Homebuyers in a Buyer's REO Market

Chris Bowden
Chris Bowden, SVP HomeSteps

Owner-occupants buy about two-thirds of the foreclosed homes sold by HomeSteps®, Freddie Mac's REO sales unit. That's an average we shoot for because we believe a strong emphasis on selling to owner-occupants can help stabilize communities and local home prices.

But as the housing recovery took hold, it became a challenge to maintain that average. Fewer REO homes were going on the market. Buyers looking for a house to live in began losing ground to well-heeled investors looking for single-family homes they could rent.

In order to compete for sales in a tighter market and keep our focus on selling to owner-occupants, we recalibrated part of our business strategy. We started repairing or upgrading more homes in our inventory before putting them on the market. In an average year, we might make limited repairs to about a third of the homes HomeSteps sells. By contrast, in 2013, we repaired or upgraded nearly half of our HomeSteps homes before they were listed. (We sold more than 72,000 homes last year.)

Repairs, recommended by the listing agent to HomeSteps, are evaluated using a combination of advanced data modeling and more than 25 years of industry experience. The goal is to identify and green-light the specific repairs, including kitchen and bathroom upgrades, which are most likely to build traffic, attract competitive offers, and be cost-effective.

Next, we recruited 150 experienced general contractors to HomeSteps' national vendor network to undertake the additional work. Finally, we connected our existing network of 2,000+ listing agents with our expanded vendor network to undertake approved repairs.

The results are exceeding our expectations. We're seeing sale prices that are paying for the repairs, stabilizing local home values, and returning tens of millions of additional dollars to our taxpayer shareholders in the form of reduced mortgage losses.

Minnesota House Kitchen

Consider this Minnesota house. Its appeal, according to the listing agent, was diminished by a boxed-in kitchen that included a wall with a slot for passing dishes to the adjacent dining room. “When a buyer sees something wrong, they’re thinking ‘what else can I find wrong’ instead of ‘can I see myself living here,’” says Lynn Hooper of Customer Driven Realty in Shorewood, Minnesota.

We approved her recommendation to open up the kitchen, she arranged for a contractor from HomeSteps' vendor list, and the result is the warm and inviting space pictured below. When the house went on the market in mid-February it attracted a steady stream of interested buyers, despite sub-zero weather, and two excellent offers – including the winning bid.

Minnesota House Renovated Kitchen

What happened in Minnesota is happening in markets across the country with similar results. The challenge in 2014 is to continue to monitor the market as it evolves and fine-tune our sales approach to sell our homes at competitive prices that foster homeownership opportunities, stable communities, and strong returns to Freddie Mac’s shareholders.

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