András Kondor: Optimizing return from NPL properties


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Basing NPL property strategy on understanding local property market.
Analysis the liquidity of your portfolio
Definition of NPL property solutions and design decision tree
Implementing processes to sell cooperatively and on auctions.
Buying in case price does not reach predefined level

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András Kondor: Optimizing return from NPL properties

  1. 1. Mortgage Collections International Conference 24-25 of October 2013, Barcelona Optimizing return from NPL properties Presented by Andras Kondor Director of Real Estate Services OTP Bank, Hungary Barcelona, 25 October 2013 Understanding and segmenting local property market is the bases Annual residential transaction number Residential property turnover speed (%) 600 000 3,5 500 000 Turnover speed = annual transaction number / existing dwelling stock (%) 3,0 400 000 2,5 300 000 2,0 200 000 1,5 100 000 1,0 - Ukraine Romania Hungary Bulgaria Croatia 0,5 0,0 Defined key segmentsHungary real estate markets of the Bulgaria Croatia Romania Ukraine example #1 Transaction volumes and property liquidity estimated by county and type of dwelling Segments defined based on estimated average sale time Outstanding turnover speed Expected Average Sales Time: 6-9 months. #2 High turnover speed Expected Average Sales Time: 9-12 months. #3 Medium turnover speed Expected Average Sales Time: 12-18 months. #4 Low turnover speed Expected Average Sales Time: 18+ months. 2
  2. 2. Real estate agency markets also analysed 59% of the NPL portfolio is situated in 12 cities where at least 10 collateral properties are located. Here the presence of Re/Max, Top-Home and Zane is the most remarkable. Cities with more than 10 NPL property collaterals (number) 45 40 35 30 25 20 15 10 5 0 PULA Re/Max, Savills ZAGREB Analysis of agency market dynamics: Commossions Share of professional transactions Level of exclusivity Territorial and property type coverage Number of offices and agents Key marketing tools and portals Experience in working with banks and NPL properties Re/Max, Top-Home Zane, Biliskov DUBROVNIK Savills ZADAR Re/Max, Top-Home SPLIT Re/Max, Top-Home, Savills, Kastel, Zane, Biliskov - SISAK Top-Home OSIJEK Zane - ROVINJ - RIJEKA Re/Max, Zane MLINI - 3 Portfolio mapped by property turnover 108 +10%, +20% 106 Property turnover versus collateral value by county and type of settlement 104 22 20 18 DPD90+ Collateral value High exposure 16 14 Medium exposure 12 10 8 6 Low exposure 4 2 0 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.5% Property Turnover Low turnover Medium High turnover Outstanding turnover 4
  3. 3. A careful selection and implementation of real estate products can improve the effectiveness of RE solution A comprehensive set of active real estate solutions is needed to decrease the share of unsold properties and increase overall recovery from collateral. Pricing of property is key success factor. Description Cooperative sales Why to apply? Highest return with sales price close to market prices and low cost Quickest solution Key success factors of implementation Ensuring initial client readiness to cooperate Efficient pricing of property Continuous management of client Management of RE agencies Description Bank and Agencies help potential buyers to get informed about the auction, the property, the auction buying process and other circumstances 3rd party buys the property via auction Why to apply? Cooperation cannot be achieved Attract market buyers Auction price is acceptable considering other alternative Key success factors Ensuring proper information flow to potential buyers Auction process management Motivation of agent/agencies Description Bank buys property at auction at auction price & gets into possession Bank takes transaction and operational costs involved with sale and management of property Bank sells property as own property at market price Why to apply? Price at auction is lower than potential sales price minus all costs adjusted to risk Auction process too long Key success factors Estimation of property sales price Property management Efficient sales of own property Debtor signs a cooperative agreement which lets the RE to be marketed by a RE Agency Foreclosure Process is temporarily stopped Auction demand management Active auction purchase 5 NPL decision tree established to leverage cooperative solution for superior return over auctions Expected recovery(1) Available NPL solutions and their decision tree FINANCIAL SOLUTION COOPERATIVE RESIDENTIAL NPL CASES REAL ESTATE SOLUTION NON COOPERATIVE SUCCESSFUL NON COOPERATIVE FROM COOPERATIVE NOT SOLD COOPERATIVE SELLING >90% 75-85% SOLD THRU AUCTION AT EXPECTED PRICE 45-60% AUCTION PURCHASE AT DEP (2) 45-60% NOT SOLD (1) Recovery from property (100% LTV). Example (2) DEP: Defensive entry price at which it is worth buying property at auction, in order to avoid additional loss due to too low auction price 6
  4. 4. Cooperative sales is the starting real estate solution. Processes, key success factors and touch points defined Getting RE solution approved Client signs application form, agrees to RE appraisal and data transfer to agencies. Valuation of property Property appraisal ordered by RES, validated by Validator. Market and Liquidation price approved by Factoring. Listing of property Pricing agreed with Client. Contract with Client signed. Properties listed by 2-3 external agencies. Pricing of property Marketing & Sales Continuous price adjustment to the market conditions based on agreed price dropping Signed sales contract. Decision on remaining debt. Factoring management of client non-cooperation, when needed Detailed and clear explanation of Client current situation and possible next steps. Emphasizing CS financial advantages Access to property. Managing client non-cooperation. Touch point management between Factoring, RES and validator. Market focused price definition. Detailed and clear explanation of pricing for. Updated data flow between RES and agencies. Managing agency Managing client expectations. non-cooperation by Factoring. Decide on letting collateral out and on remaining debt based on delta rule considering the recovery of auction solutions. 7 RES is key participant of the Auction Demand Management Start foreclosure process Main responsibility Expected main results Listing and marketing Selling Factoring RES RES Factoring is responsible to put all noncooperative cases in legal phase. Right after auction time is set property documentation and auction details given to RES so that the AMD process can start. Photos of auction property from outside done or usage current photos from previous evaluations. Marketing description prepared. Ad price defined. Properties are strongly marketed on key real estate portals. Property statistics (visitors, interests) managed. Properties are allocated to agencies. Interest of potential buyers are handled by RES. Interests with price information registered. Information on auction process provided (foreclosure risks, expected date of auction, viewing possibilities, possession taking). Urge potential buyer to visit property. Handle agency requests and collect agency interest registrations. Auctions Register sale and check if there was an ADM registration form signed by the actual buyer. 8
  5. 5. Property is bought unless price equals defensive entry price Process of Defensive Auction Purchase Transferring case to RES Property evaluation Cost estimation and DEP Decision on purchase Auction purchase Preparation for sales Strategic Price Levels for DAP (Defensive Auction Purchase) Defensive entry price = ESTIMATED FUTURE SALES PRICE estimated operational and transactional costs Information provided by New Independent Appraisal 150 100 50 0 MARKET PRICE provided by new appraisal Liquidation price provided by new appraisal = ESTIMATED FUTURE SALES PRICE Starting auction price defined by executor DEFENSIVE ENTRY PRICE (DEP) 9 The Sales of Own Portfolio has also been defined Key steps Main responsibility 2 3 4 Pricing of property Key success factor / RE has been acquired Detailed information on property available RE has been emptied and overtaken Legal emptying action should be started as soon as possible. Value protection in properties is essential. / 1 RE take over Expected result of the phase External/Internal property appraisal (if needed) Agreed starting sales price and price dropping mechanism Close cooperation between Owner and RES. Starting sales price is essential usually estimated market price Viewings of property Regular reporting of key activities on each property Offer(s) from potential Buyer(s) Marketing and sales activity with agencies Controlled price dropping Decision on accepting bid Signed sales contract Property handover Precise and detailed decision making Active connection with potential buyer (RES) RES Marketing and Sales RES Decision and Deal closing Owner / (RES) 10
  6. 6. In sales several options considered based on key decision factors. Property competence required for each Key decision factors Recovery = Collect as much cash as possible from financial solution or Sell collateral at highest possible price Cost efficiency = costs low, but control overall return (size of portfolio) Time to realize return = realize return as soon as possible Property competence Define client level recovery strategy Pricing of property including purchase price and selling price Get clients to cooperate Offer financial solution Check viability of real estate solution in case financial solution is has low chance or rejected Introduce real estate solution and get client approval for RE solution Ensure case ownership including hanlding client noncooperation and quick decision making Options Building own operation with direct agents (solution in OTP Hungary) Setting up own franchise operation Buying a RE agency network Granting exclusivity on property bases and build Strategic cooperation with one or a few key player(s) Cooperation with several market players without granting exclusivity 11 7 key points 1. Local property and real estate agency market should be understood and segmented. This should become the bases of NPL property strategy 2. NPL property portfolio to be mapped against market in order to define its liquidity 3. A decision tree of real estate solutions needs to be designed with estimated recovery tartgets. Cooperative solutions need to have priority as they provide superior return 4. Key real estate solutions should be defined. Each process needs to be detailed. 5. Auction demand managment needed to boost return from auctions 6. Defensive auction purchase based on defensive entry price is proposed in order to minimize loss 7. Cooperative sales and sales of own portfolio requires careful consideration of sales options based on key decision factors 12
  7. 7. Thank you for your attention! 13