Donating REO Property to Local Non-Profits

A Primer for Banks and Mortgage Companies

by Brent Wilson
brentok3@hotmail.com

During the recent house price bust, a lot of lenders have or will be
foreclosing on many marginal properties. Many of these properties will be
located in high crime areas, may need extensive work, may be structurally
deficient, etc.

One innovative approach in dealing with some of these properties would be
donating them to local non-profits.

Some local non-profits, particularly those with a record of working with
housing issues and/or the homeless, would make good partners in disposing of
unwanted REO property.

Much of this type of property will have a very limited value on the local real
estate market, but the right local partner might find real value in selected
properties. 

Some REO properties will cost more to manage, repair and sell than the amount
that could be ultimately realized from a sale. Some local non-profits would
like to have a small stock of housing to use in assisting their clientele, but
lack the funds to purchase it. By donating REO property to an appropriate
non-profit, both of your problems are solved. 

Apart from the value of disposing of the property in a useful way and perhaps
saving money in the process, there is also the goodwill effect of helping a
local non-profit and their clientele. If you get some local positive publicity
from  a property donation, so much the better.


Finding a Local Non-Profit Partner

It would be wise to scout around in cities with a high REO inventory for local
non-profit partners who would be willing to accept selected REO properties on a
donation basis.

Some of the possible donees might include homeless shelters, Habitat for
Humanity in some cities (Habitat often prefers to build new housing), selected
churches (those with an active program of helping homeless and housing
challenged people), and local non-profit housing organizations. Many local
non-profits already have programs to renovate housing for low income clients,
and if you can find such a partner it could be a good fit.

One thing to keep in mind is that some non-profits have loose controls, and in
some cases the donated housing could become the property of a staff member.  It
would be wise to have some sort of restriction against staff or board members
of the non-profits being deeded the properties. 

There are those non-profits that will accept any property you wish to give
them, but it would be wise to work with partners who don't bite off more than
they can chew. A derelict property on your books that becomes a derelict
property on the books of a non-profit is no improvement.

Along those lines, it could be wise to ask for a brief business plan or action
plan from a non-profit that wishes to receive any donated REO property from
your organization. In this way you could see if the non-profit has the
resources, manpower and planning to make the donated property into an asset.
Some non-profits would be very eager to receive donated properties, but lack
the management skill to make it work. If a non-profit seems like a good
candidate otherwise but lacks management skill, you could suggest they try to
find a local property management company that could assist them at least in the
beginning, perhaps in a pro-bono advisory capacity. Many management companies
would likely be willing to do this, if it was on a small scale.


Savings from Donating REO Property

In most cases the property can be moved more quickly when donated to a local
non-profit, saving carrying costs, lawn mowing, utilities, etc. There is no
Realtor's commission to be paid, and closing costs would be minimal. Many local
partners would likely be willing to accept most properties "as is", saving on
repair and remodeling costs. 

In most cases there would be some tax advantage to the donation, but it would
be wise to consult your tax advisor for an exact accounting.


The Best Option for Some Properties

Some REO properties will sit vacant for years before finding a buyer, accruing
carrying costs the entire time. Donation of some of these properties could save
your organization a huge amount of time, money, and effort. One problem
property can cost as much as four or five non-problem properties, in terms of
costs to secure the property, repair vandalism, replace stolen air conditioners
and/or plumbing, etc. Donation of appropriate properties can make all these
problems go away. 

Donating REO properties to non-profits is an unconventional approach, but the
magnitude of the problem requires original solutions. 

In some cases when an REO property is vacant for a long period of time, it can
drag down the value of all surrounding properties. Donating this property to an
appropriate partner can get it back in shape and occupied much more quickly,
where it can help raise rather than lower the value of nearby properties.