Legal Details You Need To Know About REO

Legal Details You Need To Know About REO

With the housing slump, followed by the recent subprime market meltdown leaving a flood of foreclosures in its wake, lenders, brokers and agents have tried to rebound with real estate-owned (REO) properties. But breaking into the distressed property or REO market is difficult unless you know the ropes – and the competition for foreclosures, today, is fierce. Just ask Steele V. Propp, foreclosure specialist/loss mitigation consultant, for the Bank Owned Property Division of the Minneapolis-based Schatz Group, GMAC Real Estate.

“Last year, the Minneapolis-St. Paul area had an inventory of 600 foreclosed homes at any given time, and this year we will easily reach 900 homes,” Propp said.

“The days of only inner city broken down properties are over,” he said. “Some foreclosures are in gated and golf course communities. Anyone can have financial problems and a lot of people live close to the edge.”

“Being an REO agent seems to be the latest fad in real estate,” said Propp, a 26-year industry veteran who knows the ropes. “Everyone and their Dad have been asking about it.

“And recently a number of the guru real estate agent trainers out there have jumped on the bandwagon with so-called wonderful course material for becoming a foreclosure agent specialist,” he said. “I get e-mails everyday from these gurus who hawk their books and seminars about making a fortune in foreclosures.

“I am a bit leery of these ‘specialists’ since most seem more about you paying them money,” he added.

Break in with BPOs

“For the most part, the best way to get noticed is to offer to do the grunt work of the foreclosure industry — performing Broker Price Opinions or BPOs,” Propp said. “Agents who do this on a regular basis tend to get noticed.”

Harry C. Richardson, an independent broker and Realtor based in Albuquerque, said, “There is no substitute for experience.”

But prior to six years ago, Richardson had little experience in the REO market.

Although New Mexico has not experienced the housing market lows and highs of the Florida, California, Michigan and Ohio markets, Richardson read the signs and saw a bright future in the REO/foreclosure business.

To get a foot in the door, Richardson googled asset management companies and e-mailed BPO hiring managers for a chance. After six months of performing BPOs, he struck out on his own.

“It is important to accurately place a value on the asset (property) because the person (or bank) holding the REO is relying on you,” Richardson told Real Law Central.

Just like anything else, once you build a good reputation, word gets around.

FNF steps up

In August 2003, Fidelity National Financial launched its Web site dedicated to marketing bank-owned properties. BuyBankHomes.com opened with 7,000 REO listings which has grown to more than 25,000 post-foreclosure properties, thanks to Fidelity subsidiary Fidelity National Asset Management Solutions’ (FNAMS) relationships with 22 lenders and thousands of REO brokers with relationships to other lenders.

BuyBankHomes.com recently featured more than 400,000 bankruptcy listings and nearly 230,000 post-foreclosure properties. At the same time, RealtyTrac offered multi-state searches for 550,000 foreclosure properties, and reported that one out of every 886 homes in the nation are in some phase of foreclosure.

Last year, Tom Di Mercurio, a veteran specialist in defaulted properties, launched Mercury Alliance which works with lenders in 15 U.S. markets dealing with homes, condos and other properties that go south.

Any significant increase in interest rates triggers a rise in lender-owned properties for resale – and opens the doors to more foreclosed homes, Di Mercurio said.

A rose by any other name

“There are no special legal requirements except to be licensed in the state jurisdiction in which you operate,” DiMercurio told Real Law Central. “A broker is a broker is a broker. It’s the same with a buyer’s agent.”

Be an aggressive, hard-working agent, he advised, adding that by law, all listings are the property of the ‘broker.’

“The documentation in typical residential mortgages and foreclosures/REOs should be similar, but since we are involved with the removal and elimination of property rights, there is a formidable body of civil law to protect owners/borrowers from the elimination of their property rights,” he said.

“Most residential brokers/agents seldom deal with eviction and cash-for-keys or the problems associated with a ‘botched’ foreclosure – where all the regulations have not been scrupulously followed,” Di Mercurio said. “Otherwise, not much is different.”

Rather switch than fight

The switch from traditional residential properties to REO’s does demand a different mindset, and you must cater to the schedule of the lender or client, he said.

“Doing REO’s is a 24/7 job including property management which gives rise to custodial liability,” Di Mercurio said. “After two years of operating, I am just now opening a ‘regular’ side to my REO brokerage with buyer’s agents and non-REO sellers’ agents.

“Understanding the deliverables of lender clients is a must – and while 90 percent of it is the same, managing the 10 percent difference can be difficult,” he said.

Wanted: Superhero

“What asset managers want is a cross between Superman, Wonder Woman and Spider Man,” Di Mercurio said. “REO agents become the eyes and ears of their clients.

“Too often, asset managers settle for easy things like inspections and BPOs on time rather than a thoughtful analysis of what the broker’s market intelligence and experience tells us about a property or a market,” he said.

“Asset managers should encourage a healthy dialogue of marketing ideas and be open to criticism,” Di Mercurio said. “If appraisers were always correct – or even often correct on REO’s, then formulating a listing price could be a computer program. Setting a list price is more art than science.

“What REO brokers want is a seller treated as a partner,” he said. “We want to know that someone is listening to us and that we are at the end of a long continuum that ultimately results in the liquidation of the non-performing asset.”

Waiting for payday

Unfortunately, “compensation is often only a possibility,” Di Mercurio said. “If listed too high and then re-listed with another broker, our efforts are all in vain. Brokers want some acknowledgement that we work very hard and sometimes in difficult situations for discounted commissions.

“For me, (the REO business) is a labor of love,” he added.

Di Mercurio recently offered a number of tips to agents and brokers trying to break into the REO market.

First, understand the basics before deciding to focus on the REO segment, he said. Everything about this business is time sensitive. The REO broker’s responsibilities are more similar to that of a relocation broker than a traditional residential brokerage.

There are many uncompensated activities required of an REO broker, and if a home does not sell in the normal listing period, it may be reassigned, Di Mercurio said.

Volume pricing has resulted in an average five percent commissions, he said, adding there is a host of services, responsibilities and liabilities assumed for the average two percent listing commission paid to the REO broker.

Most of Di Mercurio’s clients assign assets to him the day of the foreclosure sale, and these require a 24-hour occupancy check and weekly checks, thereafter, he said. Most properties are still occupied at the end of redemption, thus requiring extra work for the broker to negotiate with the tenant or former owner, attend lock-outs, obtain bids for repairs and supervise rehab, regular yard maintenance and winterizations.

Many lenders require the broker to arrange for pay and seek reimbursement within certain tight time frames, he said. The broker then becomes the “de facto” guarantor of the goods and services. Poor accounting will lead to losses in un-reimbursed legitimate expenses.

Brokers generally receive property assignment directly from the seller/lender or from a third-part outsourcing company which provides aggregated accounting, tracking, reporting, advice and evaluation to the actual lender or seller, Di Mercurio said. The actual owner of the property may have little or no say in how the REO properties are managed because of delegating those responsibilities under a servicing agreement.

Many REO properties are handled through government agencies, he said. HUD administers foreclosed homes under the FHA program; the Veterans Administration handles loans made to veterans where the mortgage has been foreclosed.

HUD and VA have different disposition models and strategies which offer equal access to licensed and certified real estate agents and brokers, Di Mercurio said. Fannie Mae and Freddie Mac handle their own foreclosed home inventory, both relying on the listing broker to provide the delivery of many of the property management services.

Many properties are handled directly by the REO Department of the bank, mortgage company or credit union and placed with the broker, he said. In this case, you need to be individually approved.

To be considered for these assignments, you must have either a sales agent or broker’s license in the state where you plan to sell these properties; have a minimum of three years experience representing one of more sellers, a minimum of $500,000 professional liability insurance and two to three client references, Di Mercurio said.

Find out how your asset manager contact is compensated, he advised. Many sellers or outsourcers skew the overall compensation package toward bonuses. A rollover closing from one month to the next may only seem like two days to you, but it may be the difference between no bonus and an outstanding bonus. Corporate sellers generally require 48 to 96 hours to execute and return closing documents.

If the property doesn’t sell while you are the listing broker, you only get reimbursed your expenses – and some lenders remove unsold inventory to a different broker — even if never priced accurately, Di Mercurio said.

REO brokers need a network of service providers from locksmiths, to yard and snow removal vendors, contractors and engineers, he said.

“On average, expect to advance approximately $600 per property depending on what specific services you provide,” Di Mercurio said. “Advances of $3,000 on a specific property, is not uncommon.”

A good, conservative, realistic estimate is to average your sales at a two percent listing commission, he said. If the typical REO asset sells for $50,000, can you make it worth your time to be on call 24/7 … to get a $1,000 check at the closing – if it closes.

“I personally know several REO brokers who professionally handle upwards of 300 REO sales a year for a net pay-out of $80,000,” Di Mercurio said.

Breaking in, hard to do

“Notwithstanding the foregoing “reality” checks, understand that prior to you opening your doors to declare your specialty, sellers/lenders had been receiving your service from some other brokers,” he said. “If just one of several brokers delivered competent service, it may be difficult to get an opportunity to show what you can do.”

It is one thing to read and understand a list of “deliverables”, another to organize a work flow which meets or exceeds the client timelines and other performance metrics, he said.

Make a complete and thorough application with whatever outsources or lender/seller has an open application process, Di Mercurio said. Think about how you can stand out in the crowd, what you can offer that no one has.

“If you are an experienced agent or broker, two or three well-written client testimonials that attest to your extraordinary handling of a difficult transaction adds credibility,” he said.

“If you serve one or more specific communities or an emerging market and speak a foreign language with sufficient competency to explain a real estate transaction, you bring additional value,” Di Mercurio said. “Highlight that value; market yourself.”

Then send a follow-up letter to the vendor manager in English and the other language you speak and add historic perspective and accuracy to a foreclosure and understand the client’s requirements, showing you will work to get the property sold, he said. If you can sell a well-priced conforming home in a demand market, the client will remember you for the substandard or condemned property.

“Ask to accept leftovers or the assets that didn’t sell with other agents – for whatever reason,” Di Mercurio said. “Ask for the problems and think and work toward a creative solution. The harder you work, the luckier you get.

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