Residential Real Estate
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REO Brokerages
Realty Times editor, Blanche Evans, recently interviewed Tom Di Mercurio, owner and broker of The Mercury Alliance, LLC of Denver, Houston and Tulsa, who also plays a strong role with The Freedom Realty Exchange, about REO brokerages. (For more about Mr. Di Mercurio, visit themercuryalliance.com.) Question: With all the statistics about the housing bust (foreclosures reaching record levels in some areas) what advice would you give an agent or broker about successfully going after these foreclosed homes? Blanche, as with any area of business specialization I recommend understanding the "basics" before making any decision about focusing on the REO segment. This is not an easy business! I"ve always worked hard and enjoyed real estate, but I can say that the last year and a half, working exclusively as an REO broker, I"ve never worked harder. I have attacked bad loans and REO from virtually every level, starting with my own bad loans many years ago, and while I have been continuously licensed as a Broker and maintained my Realtor® status throughout those many years, I worked REO primarily from the client or third-party (outsourcing) side. I believe I have always had a superior understanding of the broker side of the REO business, but not until now could I say I really understood the economics and the demands. First, understand the commitment of time and financial resources. While representing lender/sellers of foreclosed homes seems to be just the listing of real estate, it is far more complicated. Everything about the business is time sensitive. The REO broker"s responsibilities are more similar to that of a Relocation Broker than traditional residential brokerage. There are many uncompensated activities that are required of an REO broker; and in the event the home does not sell in the normal listing period it may be reassigned. Moreover, real estate fee compression has reached deep into the listing broker"s pockets. Volume pricing has resulted in about a 5 percent commission as being average. There is a whole host of services, responsibilities and liabilities assumed for the average 2 percent listing commission paid to the REO broker. As an example, Colorado is a redemption state. "Non-farm" properties provide for a 75-day period before the foreclosure title vests unconditionally with the foreclosing lender. During that period, the former borrower has the right to reside in the property and has the right to "redeem" by making the lender whole. Most of my clients assign assets to me the day of the foreclosure sale. These require a 24-hour occupancy check and weekly checks thereafter. 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 watering, winterizations and de-winterizations. Many lenders have arrangements with national field service providers to provide some or all of these services. Many lenders require the broker to arrange for, pay for, and seek reimbursement within certain tight time frames. 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 assignments directly from the Seller/Lender or from a third-party outsourcing company which provides aggregated accounting, tracking, reporting, advice and evaluation to the actual Lender or Seller. The actual owner of the property may have little or no say in how the REO properties are managed because they have delegated those responsibilities under a Servicing Agreement. Nationally, many REO properties are handled through government agencies: "HUD" is the Cabinet Level Agency which administers foreclosed homes under the FHA program; and the Veteran"s 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. Fannie Mae and Freddie Mac ("Homesteps" is Freddie Mac"s widely known and successful disposition arm) are two government sponsored agencies which directly handle their own foreclosed home inventory. Fannie Mae and Freddie Mac have approximately 20 years experience in the management and sale of their foreclosed homes and follow a more traditional real estate sales approach (vs HUD and VA) Both rely on the listing broker to provide the delivery of many of the property management services discussed previously. Another large national channel consists of outsourcing or "third party" companies which provide a whole host of services as aggregators. They stand in between the client and the broker and select, evaluate, oversee and manage the local brokers. They also provide accounting and management oversight that governs the administration of a foreclosed asset to, and through, the sale which may include eviction services, the buyout of redemption rights, title curative, analysis of "as-is" versus "as-repaired" sales strategies, broker"s value versus appraiser"s value with a reconciliation and advice to the client on how to position the property. In this role, the outsourcer becomes the broker"s client. Many properties are handled directly by the REO Department of the servicer, bank, mortgage co, or credit union and placed with the broker. In this case, to be considered for a property assignment, you must be individually approved. And the last, and typically smallest national channel consists of mortgage insurers who have paid their claim to the foreclosing beneficiary and acquire the property. Most networks are open to an application. The largest and most prominent are listed at the end of this article. Generally to be considered for these assignments, you must possess either a Sales Agent or Broker"s license in the state where you intend to sell these properties, have adequate staff, a minimum of three years experience representing one of more corporate sellers, a minimum of $500,000 Professional Liability Insurance and two to three client references. Be prepared to do "fee" BPO work (broker price opinions) to earn yourself a good reputation with the seller. A way to "test the waters" is to apply and hopefully have the opportunity to successfully manage a few REO homes to the closing table. The client or seller/lender will evaluate your performance on timeliness of tasks, accuracy of suggested value from the Broker"s Price Opinion to the ultimate sales price, overall days on the market and the friendliness and competence of you and your staff. While 90 percent of this business is consistent, managing the 10 percent variance may be troublesome. Start with one client and follow through until you"ve got a seamless process. Also realize, although you may be representing one client or outsourcer, that assets may have different general rules. Different asset managers have different styles and interpretations. Some assets have primary and pool mortgage insurance which dictates special handling. Find out how your Asset Manager contact is compensated. Many sellers or outsourcers skew the overall compensation package toward bonuses to achieve certain disposition targets and goals. A roll-over closing from one month to the next may only seem like 2 days to you but it may be the difference between no bonus or an outstanding bonus. Try to schedule all of your closings a few days prior to the client"s monthly cut-off. Corporate sellers generally require 48 to 96 hours to execute and return closing documents. Most sellers require weekly property inspections plus the initial 24-hour occupancy check. Moreover, as a property manager someone must be on-call virtually 24/7 to deal with vandalism, fires, broken pipes, floods, fallen trees and, squatters. Corporate sellers are risk-averse and are therefore concerned with any potential liability arising from the property. As an example, snow removal is often governed by city statutes and often becomes the broker"s task. Snow days require planning and mobilization. Pay particular attention to a property"s characteristics that may give rise to special handling: attractive nuisances, unprotected swimming pools, shaky stairs or steps. Since the client or outsourcer rarely sees the property, you must be their "eyes and ears" and ensure that your advice and warnings are satisfied. Some clients or seller/lenders often have "rules" regarding the broker"s proximity to the property. Other clients prefer to aggregate with specialists. As an example, my company is 99.9 percent an REO residential brokerage. While we can and quite capably professionally handle the needs of our seller clients, a typical residential listing customer would likely not like to be identified with a firm that handles mainly foreclosed properties. Moreover, sometimes you never really get a "bite at the apple" because the property is redeemed or the asset sold in a loan pool and/or the listing price never gets "right priced" for the market. If the property doesn"t sell while you are the Listing Broker you will only get reimbursed for approved expenses which were submitted in a timely fashion. Some lenders remove unsold inventory to a different broker even if never priced accurately. The prior investment of time and energy spent in securing, inspecting and marketing the property uncompensated expense. While it is true that if a broker lands an REO account he may get many listings from that client, staffing and reporting costs are heavy. Properties which never reach the closing table are strictly expense items with no recovery. REO brokers need a network of service providers: from locksmiths, to yard and snow removal vendors, contractors, engineers. And you must have "float" to cover many of these expenses until reimbursed. On average expect to advance approximately $600Pages: [1] 2