When Mary Poland-Smith went into real estate 14 years ago, she never imagined that part of her job would involve handing out “cash for keys,” to persuade former home owners or renters to vacate their premises.
“It did feel uncomfortable in the beginning,” says Poland-Smith, an agent with Better Homes Realty Inc. in Montclair, Va.
For real estate agents across the country, getting people to move out of their homes without a costly and time-consuming eviction is increasingly part of the job description.
Sales of so-called “distressed” properties, meaning those in or near foreclosure, make up about 30 percent of home resales in today’s extremely depressed housing market.
Foreclosures have slowed this year largely due to legal issues resulting from so-called “robo-signing” but are expected to accelerate again soon as lenders move forward with sales of repossessed homes, according to RealtyTrac, which tracks the foreclosure market. The company projects about 2 million foreclosures this year, 30 percent below last year's levels.
That is a lot of added inventory in a market where less than 5 million units are selling annually.
The rise in sales of distressed properties calls for new skills. The National Association of Realtors reports that 21 percent of its members now hold special certifications to handle distressed property, up from 12 percent last year. Agents pursuing the credentials take courses on how to work with buyers and sellers in various scenarios, and how to work with Fannie Mae and Freddie Mac programs.
Not all agents set out to become distressed property specialists. Poland-Smith, for instance, says banks would call her for “broker price opinions” on various properties, a form of valuation that could be used for multiple purposes—including for a bank to estimate value in an eventual sale. Within a few years, banks began calling her to represent foreclosures.
Poland-Smith says she begins the process of selling a foreclosed home by checking to see whether the property appears occupied: Cars in the driveway, toys in the yard or lights on at night.
She then typically contacts residents three ways: She slips a hand-delivered letter under the door and also sends a letter in both regular mail and certified mail. All the letters state that eviction is avoidable and money to move is available—if the occupants call her within a few weeks. In 90 percent of cases, they do, she said.
She’s typically able to offer them between $500 and $2,500, depending on the lender, if they agree to move out within 30 days, leaving the place “broom-swept” clean.
Foreclosure experts note that “cash for keys” may become more mainstream not just for foreclosures but also for short sales, where an owner is trying to sell their home for less than they owe. In those cases, the lender must agree to accept the sale price.
Earlier this month, Bank of America began piloting a program in Florida that pays short sellers up to $20,000 “cash for keys,” and also forgives their loan shortage (or deficiency). It’s a nice hunk of money for owners otherwise facing eventual foreclosure and a ruined credit profile, although it’s not an option for all sellers.
“The reality is that (cash for keys) saves a lot of money for both the owner and the bank,” says Cliff Roe, a broker and distressed property specialist at Cliff Roe Realty Inc. in Seminole, Fla., who has been briefed on the new program. “Other banks are going to follow suit.”
Lenders lose money on a short sale or on a foreclosure, so their willingness to pay “cash for keys” may depend on how much they stand to lose. According to RealtyTrac CEO James Saccacio, the typical foreclosed, bank-owned home sells for 40 percent below a comparable non-distressed property, while a short sale typically sells for 20 percent less. Capturing a home before it falls into foreclosure might make financial sense to lenders in some cases, he says.
“At some point the equilibrium line gets crossed,” Saccacio says. “Everyone is realizing that the discount on (bank-owned) properties can be mitigated by treating them as short sale properties.”
Not all distressed properties require cash for keys before hitting the market. But increasingly lenders are paying handsomely to preserve rapidly diminishing value in their properties, said Benjamin Barber, a senior sales specialist Green River Capital LC in West Valley, Utah, which manages distressed properties nationwide.
“The more the inventory builds up, the more generous the cash for keys from clients,” Barber says.
Evictions are typically more time-consuming, more expensive, and require more after-care than paying an owner or renter to move and leave the place clean.
Oddly enough, evicting renters can be complicated. Depending on the state, out-of-court evictions cost $400 to $1,100, while a “contested” eviction involving litigation can cost $15,000 or more, Barber says.
“Some clients use an algorithm and calculate how much they’d pay in a contested eviction, and then offer half to the tenants,” he says.
For agents, offering bigger checks to residents and in earlier stages of the distressed property spectrum raises mixed feelings.
“But typically these people in the homes are depressed Roe,” the Florida broker. “They don’t know where they’re going or how they’re going to get there. So in the end, it’s the humane thing to do.”
“You get a little numb to it,” Poland-Smith says. “But you have to keep your humanity—and that means you take this work home with you sometimes.”