October 16, 2006
This interview was originally published on RealtyTimes.com.
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.
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, atten “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 unreimbursed 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 $600 per property depending on what specific services your provide. Advances of $3000 on a specific property are not uncommon.
Now comes the difficult financial analysis.
A good conservative/realistic estimate is to average your sales at a 2 percent listing commission. The outsourcing model has been hugely successful in the marketplace. It is largely financed through a referral fee paid out of what would have been the listing broker’s listing commission. Virtually no seller in this space pays a 6 percent commission. If the typical REO asset sells for $50,000 in your area (and don’t laugh) can you make it worth your time to be on call 24/7, at risk for an average of $600 per property to get a $1000 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 payout of $80,000.
You may make the decision to keep the “status quo” with your real estate career and to handle the occasional REO property that your local bank can provide you. Or you may be in an area where the average 2 percent commission represents enough of a margin to make this a successful business. REO agents and brokers are among the hardest working people I know.
Faced with this “new math,” you should carefully make the decision to honor the contract deliverables that each client expects. Or stay out of the business. Limiting your service to the level of compensation offered is a deception and far worse than staying out of the business. I am not writing to discourage anyone. This niche of the business has been my life’s work and I wish to do all that I can to see that is turned over to the next generation of professional agents and brokers who might have the same passion for this business that has driven my career at all levels. But approach the business warily as one would any new investment.
Now a word to corporate sellers for balance. A year from now you will be paying bonuses routinely to sell properties in virtually every market. Evaluate the suite of services you require and the average sales price in some of your markets and acknowledge that the best value in the business is the time of your listing broker.
The “best” price is of no use if it puts the best vendors out of business.
If you are a seller or outsourcer and you have no control over the pricing of the asset and the broker’s compensation, then at least be known as the “easiest” to work with and the friendliest. In the REO broker’s new math, the best experienced brokers will choose the clients they wish to work with based on the broker’s over all satisfaction. The only control that the broker or agent has is to carefully choose its Seller/Outsourcing partners.
Notwithstanding the foregoing “reality” checks, understand that prior to you opening your doors to declare your specialty, Seller/Lenders had been receiving service from some other broker(s). If that one or 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.” It is something entirely different to organize a work flow which meets or exceeds the client timelines and other performance metrics.
Make a complete and thorough application with whatever outsourcer or lender/seller has an open application process. Think about how you can stand out in the crowd: what can you offer that hasn’t been presented. 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.
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. Highlight that value — market yourself.
Send a follow up letter to the Vendor Manager in English and the other language that you speak. If you are an area specialist and have been farming a particular subdivision for years, you already follow every foreclosure and can add historical perspective and accuracy that an outsider simply cannot match. Your goal here is to get a few opportunities to show that you’ve read and understand the client’s unique requirements. And that you will work to get the property sold.
Anyone can sell a well-priced conforming home in a demand market. The client will remember you for the substandard or condemned property that you sell, the low -value asset or the mobile/manufactured homes. For the others you get a commission and following the rules is easy enough.
Ask to accept “left-overs,” the assets that didn’t sell with another agent — for whatever reason. Ask for the problems and think and work toward a creative solution. “Nothing succeeds like success” – “the harder you work, the luckier you get.”
And don’t be just a seller’s agency even though it is the path of least resistance in a very demanding space. Cultivate your coop selling agents. Help educate them so that they can sell your listings. Share whatever knowledge you have. You are the most effective catalyst to sell your own listing — either directly or through a coop. Focus on other ways to capture buyers than expensive print advertising once you know the profile of the buyer. Whenever I am finishing a Broker Price Opinion for one of my clients, after I have inspected the property and the competitive listings and solds, I sit in the driveway for 15-30 minutes to answer the most important question: what is the buyer profile for this asset.
Answer that question and you will know much about where to find the buyer. Write a persuasive and well thought out BPO which clearly supports the value. If you don’t get the price that you have recommended, perhaps your value was not well- supported. On the other hand, don’t be discouraged if your listings come back substantially higher than your recommendation. After all, you are the “new kid.” And persistence pays off. Try to get a good dialogue with the people you work with so that you understand the client’s perspective on things. And never give the impression that you are driven solely by the listing commission.
If you can approach a significantly overpriced beat up $30,000 condo with the same enthusiasm as a well-priced $500,000 “mint condition” former model home, then you will succeed and distinguish yourself.
Successful real estate agents and brokers are seasoned problem solvers. Always have a possible solution for a problem that you present to a client. Chances are very good that even though your Asset Manager may be a seasoned professional working hard with you, he or she is likely not an expert in your specific area. Closing procedures vary significantly among the states and large part of your expertise comes not only from valuations savvy, but from local custom and practice. Don’t be afraid to ask questions and challenge answers that seem to defy common sense. Try to partner with one “mentoring” type contact who shows an interest in helping you. Or find an experienced hand like myself who really wants to share a lifetime of service and experience and prepare the next generation of REO professionals.
Ask for feedback on your service. Remember that “A Complaint is a Gift” because it allows you some time to identify and rectify a potential service inadequacy.
And don’t forget to own up to your own shortcomings. Bad news travels best ahead of the catastrophe. And if you could have handled something much better, tell your client you blew it. Honesty and sincerity are generally recognized, and even if they are not, remember it’s your personal reputation. Know that some business is not worth having because it is either uneconomical or worse, to get it and maintain it, you must compromise your personal integrity.
Above all else, don’t compromise on anything you believe strongly. You may be encouraged to reconsider your value and if you have new information that is persuasive, do so. Consider everything you do as your extended resume because your colleagues will be making assessments about you that will follow you. Read and learn all that you can. Watch and study the successful REO brokers in your area that handle their business professionally and in accordance with the client’s directives.
Start following industry publications such as Realty Times, DS News, RealtyTrac, BuyBankhomes and attend industry conferences and seminars. This little niche is moving toward “standardization” of forms, process and education. This is a good trend because like it or not, become an REO broker or not, this type of business is here to stay and will dominate the real estate news over the next three to five years.
And if you ultimately succeed in getting a lot of business and re-writing the “new REO math” to profitability, remember to re-invest in others. It comes back to you ten fold and it’s just the right thing to do.
I think I could have found at least one other career path that would have held my interest for 35 years but I am still not sure what it might have been.