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Mastering Foreclosures

REO business awaits those who can juggle details and expectations for fast turnover while earning the trust of lenders.

Chris Jones, broker-owner of Hans Christopher Realty in Cartersville, Ga., has thrived for two decades by specializing in selling dazzling million-dollar homes. But these days, the fastest-moving segment of his business is foreclosure listings — at all price points.

Accruing to his advantage is the fact that the lenders and servicing companies who take possession of properties want to divest these assets more quickly than, well, the time it takes you to read this article.

So Jones, who first got involved with foreclosures five years ago, was poised for action when inventories of so-called real estate–owned properties began to escalate over the past 12 months.

“This is not an area that’s easy to penetrate. It takes months or sometimes years to become established,” says Jones. Because he already had cultivated relationships with lenders who now had mounting foreclosure inventories, Jones was ready when the foreclosure floodgates opened.

He isn’t the only real estate professional picking up foreclosure-related business. REO sales operations are booming as foreclosure filings continue at a record pace. By late 2007, U.S. home foreclosures had doubled compared with the prior year, with one in every 134 households across the country in some stage of the process, according to RealtyTrac.

With a huge number of adjustable rate mortgages set to readjust in 2008, foreclosure activity is likely to remain high through the year. Consequently, REOs are becoming an attractive specialty for real estate professionals who can handle a variety of details efficiently, work with often impatient lenders, and market properties in ways that quickly attract buyers, experts agree.

Tracking Down REO Leads

Those who want to pursue REOs need to do a good deal of legwork to get on the radar of lending and servicing companies that proffer foreclosure listings (see “Five Steps to Take,” page 33).

Once you’re established in REOs, keep your inventory to manageable levels. Jones has about 60 listings, double his volume from a year ago. “I wouldn’t want 100, since there’s a lot of time pressure. Lenders want them sold in 30 days, and I have to keep them rolling,” he explains.

REOs offer some inherent advantages over conventional sales. “The transactions aren’t emotional. You’re working with a lending company that simply wants to dispose of the property at a fair price,” Jones says. “It’s not like working on the consumer side when sellers are attached to their houses because it’s where they raised their children, and they want you to appreciate the hand-painted mural on the wall.”

Darrell Gibbs, of Gibbs Realty & Auction Co. in Easley, S.C., agrees. “What’s appealing to me is that the banks look at these homes simply as assets. Dealing with consumers, a lot of reasoning goes out the window.”

For those who are efficient multitaskers, REOs offer a consistent stream of business that may be hard to find in otherwise lackluster markets. “If you’re good with details, the banks will want to keep working with you. Many of them have more properties than they can handle,” says Vince Kalachian, an associate with Coldwell Banker in Glendale, Calif., who has handled bank-owned properties for 14 years.

But all those pluses don’t mean REOs are easy work.

“Succeeding with REOs requires much more than simply putting them in the MLS and waiting for them to sell. You have to know your target market and you have to know how to market the property,” says Jones. He gives his REOs as much care and attention as his consumer listings, including producing detailed video tours of every foreclosed property and listing each on his Web site.

“You have to work just as hard on REOs as other properties,” he contends. In fact, you may need to work harder: Listing agents must oversee all home maintenance requirements for the property.

The amount of paperwork associated with REOs can also be daunting. Salespeople who represent a lender put their own name and contact information on forms that sellers would typically sign in a standard transaction. It’s also typically the responsibility of the listing agent to pay for utilities and maintenance associated with the property on behalf of the lender.

“I probably have to deal with three times more paperwork on REO sales,” says Kalachian. Currently about 25 percent of his listings are REOs, but he expects that figure could triple by the end of the year.

Don’t expect a lot of patience from lenders, who are all about getting the transaction done as quickly as possible. From the moment a lender offers a listing, you’ll likely get no more than 24 or 48 hours to decide whether to take it on.

“If you aren’t ready immediately, you’ll lose the property and may never hear from that lender again,” says Jones.

With a standard 90-day listing agreement, considerably shorter than the six-month consumer contract, sales associates must provide lenders monthly status reports that document every action made to sell a property, including the number of open houses and private showings. And if the home isn’t sold during the 90-day period, lenders are likely to reassign rather than renew.

Because banks and other lenders are eager to maximize their recoveries on foreclosed properties, their initial pricing may seem high for the local market. Jones says that one lender in his area, JPMorgan Chase, recently insisted on listing a small two-bedroom foreclosed house at $159,000 even though a similar resale in mint condition on the same block was listed for $156,900. He managed to persuade the lender to lower the price to $154,900, though Jones thought the asking price was still too high.

Although you’re working just as hard if not harder, you may not earn the same commission. It’s common for salespeople to lower their commission by about a percentage point on REO sales, and experienced salespeople realize they often have to be willing to cut their own share to attract buyer’s agents and get a home sold.

“We know to give up a little — usually half a percent — to attract a cooperating agent. You have to work harder for a smaller fee,” says Jones. In the end, it’s common for Jones to net 1 percent to 1.5 percent after MLS fees, marketing costs, and property maintenance, which may or may not be fully reimbursed by the lender.

The stress hardly eases up once a sales contract is signed. If a closing is delayed, lenders typically assess buyers with late fees of $100 per day. Gibbs notes that pressure to close transactions by the end of the month is high because asset managers often earn bonuses based on the monthly volume of transactions they clear.

Another REO Source: HUD

Besides looking to lenders, another source of REO listings is the federal government. The U.S. Department of Housing and Urban Development has an inventory of about 28,000 foreclosed properties that require buyers to work with real estate professionals who register at no cost with the HUD Homes program.

“It’s a great opportunity for REALTORS®,” says Laurie Maggiano, HUD’s deputy director of asset sales. One major change to the program in recent years has benefited practitioners. In 2003, HUD eliminated broad listing broker contracts, which typically allowed a single broker to hold all HUD listings for an entire state.

Responding to requests from the NATIONAL ASSOCIATION OF REALTORS® to expand access to the program, HUD’s management and marketing contractors now work with listing brokers who are in reasonable proximity to the properties and can provide better marketing services because of their familiarity with the area.

HUD also now allows listing brokers to use their own signs rather than stark blue HUD signs that previously were required to market HUD homes.

Currently 33,000 licensees are registered to sell homes for HUD. Maggiano says about 50,000 homes have been sold annually in recent years, noting that HUD’s foreclosure numbers haven’t shot up because of HUD’s loss mitigation efforts.

The condition of foreclosed properties is improving in many markets as more higher-end homes end up in the possession of banks and other lenders. And buyers are increasingly likely to be consumers rather than investors since many homes are near move-in condition at the time of sale.

Jones sold 60 REOs in 2007, roughly double his 2006 level when foreclosure inventories were already beginning to rise. And he’s getting choosier. He’s now taking on only foreclosed properties priced at a minimum of $120,000. “There’s more margin in it, and they’re easier to sell,” he explains.

No property is too small for Gibbs in South Carolina. He and his 25 sales associates juggle HUD properties and bank-owned foreclosures with conventional listings. But the explosion in foreclosures has created branding confusion for consumers, he notes.

As he became known as the king of foreclosures in his area — his brokerage sold more than 800 bank-owned and HUD properties last year — it became more difficult to get conventional listings. To work around the issue, he created a new division in April 2007 called the Carolina Home Showcase that is completely separate from his REO business. “We learned it’s not a good idea to mix the two. And now we’re taking the area by storm,” he says.

The storm of foreclosures nationally may still be raging, but real estate professionals who take the time and develop the expertise to work with REOs could find themselves sailing smoothly through 2008 with more business — and better long-term relationships with clients and lenders—than they had before the REO rampage hit.

Five Steps to Take

Join default services organizations and attend conventions where lenders, servicing companies, and other industry representatives are. These include REO Network, REOMAC,and the Five Star Default Servicing Conference.

Sign up with lenders to provide broker price opinions, which determine what a foreclosed property is worth. Taking on these home valuations for the lending industry will increase your exposure and may eventually lead to property listings.

Although taking some pro bono assignments through your networking with banks may help give you a start, you can expect to earn $50 to $150 per price opinion, depending on how extensive an analysis is done. Those seemingly spare fees can add up. Jones earns about $3,000 a month from BPOs. Respond quickly to BPO offers, since chances are several inquiries have been made and the offer usually goes to the first salesperson who responds.

Describe properties as foreclosures in your marketing if lenders allow it. “Whether or not the listing is offered at a deep discount, many people assume it is, and it’s likely to draw a lot of interest from buyers,” says REO specialist Vince Kalachian, an associate with Coldwell Banker in Glendale, Calif. “We generate more calls and offers when we advertise foreclosed properties because of this perception.”

Ignore e-mail pitches for fast-money REO schemes. “Unscrupulous companies are surfacing daily with step-by-step instructions that are probably too good to be true,” says Sheryl Vogel, a broker-associate with Keller Williams Hudson Valley in New City, N.Y. “Practitioners need to be skeptical about these offerings.”

Use lenders you have worked with on previous transactions as references in making connections with other institutions. Regularly tell those you hope to work with about successful transactions you’ve completed. Continued networking and follow-up will keep referrals coming in. “Don’t stop pounding the pavement,” says Vogel.

Rx for the Financially Stressed

When home owners first get into financial trouble, falling behind on a mortgage payment or two, their usual reaction is to do nothing—hoping the situation will somehow improve. When it doesn’t and the collection letters or phone calls start coming, the ensuing panic may morph into even deeper paralysis.

Such duck-and-cover tendencies are regrettable on several levels. Not only is the borrower likely to lose his home through foreclosure or a short sale in which the home is sold for less than the mortgage amount, but such a scenario may signal that the real estate practitioner has failed to build a trusting, helpful relationship that a borrower can call upon when times get tough.

“My relationship with clients never ends at the closing table,” says Rosa Bueno, a sales associate with JMAC Real Estate in Elmhurst, Ill. “I’m always checking in. Many of my clients are first-time buyers. My main concern is to reach people before they go into default. I want to understand the hardship that they have encountered.”

Real estate professionals are playing an increasingly visible role in helping financially distressed owners. Their involvement may be as simple as referring borrowers to a local HUD-certified housing agency whose counselors are trained to renegotiate loan terms with lenders.

Lender loss mitigation departments are often willing to reduce payment amounts for a certain period, restructure a payment plan, or add delinquent payments and taxes to the remaining loan balance.

A voluntary mortgage aid plan announced by President George W. Bush last December called upon lenders to freeze the mortgage rates of some subprime borrowers for five years. (See “Help Troubled Borrowers,” February 2008.)

Practitioners eager to help should avoid sending people to for-profit counseling services, which maintain a financial stake in the negotiations with lenders that can possibly be at odds with the interests of the home owner, notes Sheila McCann, director of outreach and development with the DuPage Homeownership Center in Wheaton, Ill. At the DuPage center, 89 percent of distressed clients were able to avoid foreclosure last year through the center’s services.

Some practitioners have gone a step further and acquired the expertise necessary to work directly with the loan servicers on behalf of their troubled clients. Bueno, who says about 90 percent of her business these days involves clients in pre­foreclosure, negotiates with lenders herself in about half of those situations. “I already have a relationship with many of the lenders they are dealing with,” she says.

If there’s no alternative to a short sale, Bueno explains to clients that this option is far better for their future financial well-being than a foreclosure. The new Mortgage Debt Cancellation Relief Act, signed into law in December, gives temporary tax relief for sellers in a short sale situation.