What three letters make bankers cry but can help industrious REALTORS® thrive when there is a prolonged real estate slowdown?

REO. That’s shorthand for “Real Estate Owned,” which is what lenders call properties they own following formal foreclosure proceedings against borrowers who have defaulted on their mortgages. Lenders truly dislike assuming physical ownership through foreclosure. When they do, they often turn to REALTORS® for help.

REALTORS® who were active from the late 1980s through the mid-1990s will remember neighborhoods filled with REO properties, particularly in inland Southern California and after the 1994 Northridge earthquake. Because foreclosure numbers lag behind sales and price trends, the REO market didn’t peak until 1997—well after the market showed signs of the recovery that led to California’s most recent real estate boom.

Today, as the market slows and foreclosures rise, banks, secondary market institutions, and REO specialists are gearing up to handle the expected increase in REO properties. While banks are mum about the topic, some veteran REO specialists offered to share their expertise with REALTORS® looking for ways to diversify their business.

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Castle Or Hassle?

Currently, bank REO portfolios are growing fatter as homebuyers who stretched to buy at the peak suffer payment shock when their low- or no-interest ARMs adjust upward. These scheduled adjustments, combined with slower sales and falling prices, mean over-extended homeowners are finding their home isn’t worth what they owe.

Many lenders will negotiate with borrowers to arrange new payment terms or agree to a “short sale” for less than the mortgage balance. But when those efforts stall, or when homeowners simply stop making their monthly payments, the bank is left with an unwanted asset it needs to get off the books—fast.

Turning REOs Into Gold

Neither Angell Benoun, an agent with DilbeckSM GMAC, REALTORS® in Sherman Oaks, nor Art Acosta, broker/owner of ERA Regency, REALTORS®, with offices in Chino and Redlands, had any idea that REO properties would become a large part of their real estate practices when they became licensed in 1989.

Getting started wasn’t easy for Benoun. For a year she called the REO department at American Savings (now Washington Mutual) each week to no avail. “One day I called and was told the person in charge of REOs was no longer there,” she remembers. “The new person and I clicked right away, and I still hold that account today.” Eventually, REO properties accounted for about a third of her business, or 100 sales a year.

Acosta started his REO business after an acquaintance from Fannie Mae handed off a couple of his REO listings. Soon, he also was handling them for Freddie Mac. Between 1992 and 1996, he averaged up to 400 REO sales a year; by 2002 that number had skyrocketed to 1,200 properties in California and beyond. When foreclosures fell to almost nil, he reverted to traditional retail sales, mortgage brokerage, and escrow. But he never lost touch with the 78 banks with which he did business, and who are calling once again.

Top REO specialists combine the market knowledge and sales savvy of an experienced retail agent with the problem-solving capabilities and discipline of a property manager. Both skill sets are required as bank clients increasingly hold REO agents accountable for specific tasks delivered against a closely monitored timeline.

Premiere Asset Services, the REO division of Wells Fargo Home Mortgage, provides REO outsourcing to more than 20 clients, including Wells Fargo. The company spells out its expectations on its Web site (www.premierereo.com).

For example, agents working with Premiere must report within 24 hours whether or not a property is occupied; if the house is vacant, the agent is responsible for re-keying or changing the locks within 48 hours, negotiating a cash-for-keys agreement within three days, providing a broker price opinion (BPO) within five days, and arranging an appraisal within 14 days after the property is vacated. Weekly property visits and monthly status reports are required.

Agents also need start-up capital and technology to be competitive. Like retail agents, REO agents don’t get paid until after the sale. Meantime, they manage and incur all manner of expenses with locksmiths, utility companies, cleaning and staging services, gardeners, and myriad other vendors required to maintain the value of the asset. Acosta estimates it takes in excess of $100,000 to get a successful REO business up and running.

Banking on the Right Price

Providing BPOs is a less expensive way to break into REOs. Because banks aren’t familiar with a property or the surrounding area, they are willing to pay agents a fee to be their “eyes and ears.” Often, they seek a price opinion during the pre-foreclosure stage. Providing BPOs gives an agent visibility with the bank and that can lead to REO listings down the line.

“A BPO basically is your resume to the bank. They want an idea of what they can list it for, what it will sell for, how many days it will take, and what needs to be done to get it market-ready,” says Kathy Owen, owner of California Appraisal Group in Agoura and a certified appraiser. “That helps the bank get ahead of the game in the event a foreclosure occurs.”

Benoun says banks pay from $55 to $85 per BPO, although some tempt agents with the promise of a listing in exchange for a free BPO. “You have to decide if you are happy doing a BPO without knowing if it will turn into a listing,” she says. “But it is one way to gain good experience.”

Owen believes banks may be moving away from agent BPOs toward full appraisals. “When they are doing a BPO, most agents aren’t doing analysis in the kind of depth they [banks] are looking for,” she says.

In the end, what seems to matter most to bank clients is setting a fair price and quickly selling the property. That’s why Benoun recommends agents pursue REO opportunities close to home, where they know the market and are more likely to set an accurate price, and where their name and experience are best known to potential buyers.

“Some agents will take a property 25 or 30 miles away just because they want that extra deal,” says Benoun. “That doesn’t do them or the lender any service at all.”

Resources

• REOMAC is a trade association that serves those working properties in foreclosure, pre-foreclosure, and bankruptcy ( www.reomac.com).

• National Association of REO Brokers Association, Inc. (www.nrba.com).

Writer: Roger Cruzen is a freelance writer and public relations consultant based in Minneapolis, Minn. Original article found at http://www.car.org/index.php?id=MzcxOTI=#