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Laying the Groundwork for Successful REO Transactions

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By Marc Gould

The real estate market has turned the corner. Am I being overly optimistic? I don’t think so. The signs and economists are saying that barring unforeseen calamities or further limitations on available mortgage credit, the housing market will continue to gain momentum into 2014.

Let’s face it though -distressed properties are still prevalent in most parts of the country. Even in areas where prices have recovered, substantial shadow inventories—repossessed homes that banks or investors often purposely keep off the market—may be waiting to hit the market. Sadly, we are still seeing real-estate owned (REO) properties as common in certain markets. Without a doubt, these transactions require more work of agents than conventional ones, as well as certain specialized knowledge. Here are four reminders for you and your agents on how to represent buyers’ best interests in these often-challenging transactions.

Educate buyers.
Everyone loves a bargain, but that doesn’t mean that REOs are for every buyer. Far from it. Agents will want to use the buyer counseling session to assess the types of properties the buyer does and doesn’t want to see, including REOs. This will require agents to credibly explain the common terminology and process of distressed property transactions and provide realistic expectations of what buyers can expect if they decide to pursue an REO.

Do the homework.
One thing that may come as a surprise to buyers is that, contrary to the “get-rich-quick” infomercials, not every REO land short sale listing is a great deal. There are some deals to be found, but at the same time, there are many REO properties that are poorly priced relative to the work required and comparable properties in the area. Simply put, agents need to be thorough when it comes to due diligence.

Buyers don’t have much recourse in an REO transaction, making it extremely important to thoroughly research the property condition and history. Look for outstanding violations, code issues, liens, back taxes, unpaid utility bills, homeowner association fees and anything else that could become a liability for your client. Also, agents need to make sure their buyer can use the property as they intend to. For example, if they’re investing in a condo, agents will need to check the owner/renter ratio and determine if there are any rental restrictions for investors. If the buyer wants to buy and live in a fixer-upper using FHA financing, agents need to make sure they understand and meet the criteria for the 203(k) rehab program.

Be aware of new and shifting “rules.”
Your agents already know what’s expected of them in a typical transaction. But in a REO sale, all those rules change. The seller is a lender represented by an asset manager who prizes a quick cash sale. Properties are sold as is. An agent’s job begins with one or more occupancy checks. Steps must be taken to remove anyone living there and/or their personal property. Everything must be handled in a particular way, so agents and buyers don’t overstep their bounds or walk into a potentially dangerous situation. Moreover, even if your agents have sold REOs before, each lender and consequently, listing agent, uses a different format and makes agents jump through a different set of hoops.

The good news is that listing agents are responsible for the dirty work. Even so, asset management companies often award buyer’s reps with a larger portion of the commission or extend incentives and bonuses to attract buyer business. To reach the closing table, odds are your agents will still need to put in extra effort relative to conventional transactions.

Stay on top of deadlines.
A missed deadline can constitute a breach of contract and cause an asset manager to cancel the deal. The good news is that problems can be avoided with good upfront planning. For buyers, closing dates are firm. Buyers need to have a clear understanding from their mortgage lenders regarding the lenders’ ability to meet the closing deadlines, particularly given that loan underwriting takes longer than it used to. Agents need to consider everything that must be done and submit a buyer’s offer with a feasible closing date. While an asset manager may grant one extension, they may also charge a per diem fee, perhaps $100 a day.

One way to get your agents feet wet is to encourage them to learn how to conduct broker price opinions (BPOs). Asset managers rely on BPOs from two or three real estate professionals, in addition to the listing agent’s BPO, to decide whether to put a property on the market, walk away, repair it, leave it as-is, or whether to accept or counter an offer. BPOs may be updated periodically until the property sells. This can also be a good way for agents to get a foot in the door with REO asset managers.

Are your agents up to the task of helping buyers close REO transactions? It’s not for every agent, but for those who embrace the challenges and begin to build a strong referral business for REOs, there are certainly rewards to reap.

A wholly-owned subsidiary of the National Association of REALTORS® (NAR), The Real Estate Buyer’s Agent Council (REBAC) is the world’s largest association of real estate professionals focusing specifically on representing the real estate buyer. With more than 30,000 active members, REBAC awards the Accredited Buyer’s Representative (ABR®) designation to REALTORS® who work directly with buyer-clients. To learn more visit REBAC.net.

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