By now most housing investors have probably read or at least heard of the New York Times story that critically portrayed REO agents as opportunists who thrive off of evicting homeowners and crushing their American Dreams. Homeowners’ Hard Times Are Good for the Foreclosure Business, which ran in the Times’ April 5 edition, chronicled REO agents living it up at the annual Reomac conference in Palm Desert. According to the Times, there was a woman wearing a shirt that said “Bank Property” across her chest and another sitting poolside who seemed only mildly interested in entertaining yet another offer on a home with an asking price of $360,000.
After the article ran, proponents on both sides of the fence emerged with outrage. Many REO agents couldn’t believe the way their profession was being portrayed, while some homeowners were quick to point out that this was just more evidence of the abuse of power and look-out-for-number-one attitude that they believe have caused the economy’s downfall.
Regardless of how one personally feels about REO agents, there’s no denying that they oftentimes hold the keys to the best housing deals around. Therefore, if a savvy investor is looking to pick up a property for up to 20 percent off its original price tag he must learn how to work with – not against – these representatives.
Understand the Nature of the Their Work
Though the Reomac conference that the New York Times reporter attended sounded like a blast, remember that these agents’ jobs involve a lot more than martini shakers and sarongs – two things that can be found at many conferences during this time of the year.
The REO agent’s job can be much more harried and complicated than that of a standard real estate broker. In a healthy market a traditional broker typically represents sellers who are eager to sell their homes, and therefore more than willing to keep them in tip-top shape to wow open house crowds.
In today’s market, however, an REO agent is likely to walk into an abandoned house in a depressed neighborhood that may have starving pets inside or appliances yanked out of the walls. On top of this they also get to front the costs associated with the home’s repairs and maintenance, for which they may not be reimbursed until 90 days after the home sells. And what do these agents get for all this added work and responsibility? If they’re lucky they’ll get a commission that is between one percent and one-and-a-half percent, far less than the four-percent to six-percent commission that traditional real estate brokers make. So although it may be true that some REO agents have found their businesses booming from the suffering of others, it’s not as glamorous as that once-a-year conference may make it seem. Remember, too, that many of these REO agents have only taken on these added roles because they can no longer make their livings as traditional brokers.
Accept that REO Agents Work on an Honor System
Aside from the whole notion that they make their livings off of failed dreams, REO agents also get a bad reputation because of their industry lacks transparency. “A lot of these guys are not submitting [all] the offers,” said Mike Morgan, a registered investment advisor and real estate broker who owns the Morgan Florida brokerage firm. “Lots of agents cheat in this game, which can make it tricky.”
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When and how often these agents “cheat” by failing to report all offers, which is professionally unethical, is not known. The chain of command goes like this: a bank enlists an REO agent to list a property in the hopes of recouping the balance left on that property’s mortgage. The agent then places the discounted property on the multiple listing services (MLS) and waits for offers to role in. An investor or potential homeowner then sees the property on the MLS and becomes interested, eventually submitting an offer to the REO agent.
Here’s where things can get messy. That agent may have a strong relationship with a particular lender, favoring any pre-approved offers that come from that lender. This may lead him to submit only the offers that have the pre-approved of that lender. Eventually, the bank may accept one of these offers, creating a win-win situation for the REO agent, as his friend gets the new mortgagee’s business and the agent gets his commission – with no one the wiser.
Some agents even secretly double-end deals, representing both the seller (the bank) and the potential buyer without the other party’s knowledge. How often this happens in REO sales in unknown, but the fact that it does happen is well known throughout the industry.
Work with an Agent Who Works with REO Agents
Because some REO agents can be unscrupulous it’s essential that you pick a broker who is not only familiar with the REO process but who has worked extensively with REO agents in the past. A good broker will know the tricks of the trade, including the ways in which naïve bidders can be taken advantage of. “An investor needs to find a broker, interview him and figure out how much he’s worked with REOs before,” Morgan said. “Really sharp investors will go with a broker who can set them up with an auto search in the MLS system.”
A broker who knows his way around the MLS is pivotal to getting an offer into the right hands. He can establish parameters within the MLS that will allow his clients to see all REO properties that meet their specifications, such as number of bedrooms and price cap. This is also helpful in cases where an REO agent may pull the property off of the MLS prior to its closing. Being that the property has already automatically appeared in the initial auto search results, the investor can still submit an offer even after the home has been pulled off the main listing page.
Smart brokers will also know what makes a good offer in the eyes of the REO agent and bank, the biggest being a lack of financial contingencies. “If you’re going to submit an REO offer don’t submit one with financial contingencies,” Morgan said. “Banks love a guy with no financial contingencies.” A good broker will also encourage his client to obtain pre-approval, especially with the bank that owns the property, and to provide a deposit of at least one percent or two percent. Aside from submitting a cash offer, which will almost always be accepted even it’s lower than others that require financing, a sizeable down payment of 20 percent to 30 percent can also show a bank that you’ve got the financial means to make this deal work.
Know Your Role in the Process
An experienced broker can only do so much, and an REO agent doesn’t do much for potential buyers aside from submitting their offers to the bank. These agents won’t help you secure the property, and they sure won’t vouch for the condition of the property, which is why investors must conduct their own due diligence.
Aside from aligning themselves with the right broker, investors must align themselves with the right inspector as well in order to fully understand the ramifications of owning that particular REO property. “Hire a very well-qualified inspector that you trust,” Morgan advised. “Don’t hire an inspector that fills out a checklist and spent $35 on an inspection kit. [Instead] spend $600 to $700 on a quality home inspection.” It’s well known that REO properties are sold as-is. However, just what that “as-is” refers to is anybody’s guess until a solid inspection takes place, which is a must-have contingency for any offer.
Investors should also research the property’s history, including who the past homeowner was and whether he accrued any liens or property fees while inhabiting the property. “An REO property comes with no disclosure, so you can get all kinds of problems,” Morgan said. “You must also check with the county because some properties have kinds of fines against them if the former owner, say, converted a garage illegally. These things can come out right at closing, and the county can come out and say that you owe it all this money.”
Whether friend or foe, REO agents are there for one simple reason: to help banks unload unwanted properties. Therefore, it is in their best interests to secure a viable, secure buyer any way they can in order to make the bank happy and secure their commission and any repair or maintenance reimbursements. This is why it’s essential for investors to assemble the right team and the right information to determine whether or not a home’s low price will actually turn out to be a good investment.