REO stands for real estate owned. It is the term that lenders—bank and government—use to describe property that they come to own because a borrower can’t keep up with mortgage payments. When a lender reclaims a home and wipes out any money due on the mortgage, it offers the property for sale as a REO. The property is usually sold as-is, even if it needs repairs.
How does a property go from a family home or place of business to a bank-owned asset? As the following diagram illustrates, the most common path begins with a default on mortgage payments leading to foreclosure.
Who Owns and Buys REO Properties?
Government Sponsored Enterprises (GSEs) own millions of REO properties. Other government entities—such as HUD, the VA, the USDA, and the Department of Treasury/IRS—also own real estate as a result of loan defaults, unpaid taxes, or criminal activity. Small and large banks own portfolios of real estate as a result of mortgage defaults. In particular, three big banks—Bank of America, Chase, and Wells Fargo—own large portfolios of REO properties.
Now, let’s take a look at the other side of the transaction—the REO buyer. There are three types of REO buyers:
- Investors: Investors buy and hold REOs in hopes of future value appreciation, fix and rent them for an income stream, or fix them and flip them in hope of making a profit.
- Home buyers: Discounted property prices offer opportunities for first-time and repeat home buyers and second-home buyers, too.
- Communities and non-profits: Community groups and non-profit organizations may purchase REO properties and fix them up to put in a new owner or sell as a fundraising opportunity. In fact, some non-profits now have real estate licensees on staff to handle the property investments.
- Considering the number of properties that must be recycled into the housing stock, the REO market is likely to be with us for years to come, particularly in the hardest hit areas. But is the REO business a good fit for you personally and professionally?
- If you decide to make REOs part of your real estate business, it is essential to understand that REO transactions follow different time frames, procedures, and sequences compared to traditional transactions. For example, the REO listing comes to an agent by assignment from the asset manager; no listing presentation involved. REOs are an as-is/where-is, bottom-line business. Successful asset managers are very detail and deadline oriented, and they expect the same of their listing agents.
- Be prepared to roll up your sleeves and get dirty. If you are squeamish about dirt and disorder, working in the REO market may be a struggle. You will encounter some properties in very poor condition: dirty, moldy, trash filled, stripped of wiring and pipes, or vandalized. You must have the fortitude to go into difficult situations and troubled neighborhoods or come face-to-face with distressed and/or angry homeowners. REO agents need to be confident in what they are doing but not confrontational. Be respectful and acknowledge homeowners’ hardship, but stay focused on your responsibilities. And if a situation feels unsafe, leave and call for help—law enforcement or your teammate.
REO service activities can easily cross the line between sales and property management. Before you start working in the REO market, do the following:
- Check with your state’s real estate licensing authority to make sure your license covers all the activities you’ll be performing on behalf of asset managers
- Make sure your firm’s errors and omissions and other insurance policies like personal liability and workmen’s compensation adequately cover your REO activities.
- You’ll need a start-up capital fund. Asset managers will expect your firm to advance payments for expenses like utility hookups, minor ($300–$500) repairs, and required point-of-sale inspections. Be prepared to wait up to 60 days for reimbursement after you submit the claim. How much capital will you need? Experienced REO professionals advise a start-up fund of about $5,000 or $1,500 per property.
- Consider whether the REO business is a good match with your broker’s business strategy, value proposition, and management systems. Without the support of your broker, sales team, and back office, you could struggle to succeed.
In order to make it in this business, I think the agent needs to have a certain soundness of mind, persistence, tenacity, and a strong constitution. In some properties, just the sight of the conditions could turn you off. If you’re not one to take good orders or follow instructions, you want to do it yourself, or you think you have a better way, working with asset managers might not be for you. Good communication skills, computer skills, and follow-up skills–these are what you need in order to make this business work.
Courage and empathy
When you go out to do an occupancy check, what is on the other side of the door is probably fear. But many times, people have said to me, “We’ve been waiting for someone to contact us and you are the first one who talks to us as a person. We’ve had people come to our door and threaten us. Why are you being so nice?” I’ll say, “There’s no reason not to be nice. What’s happening to you and your family is a horrible situation. I’m sorry for your hardship.” The seller wants them out of the house, but I have to give them the respect and dignity they deserve and let them make a dignified exit. If you don’t know what it’s like to lose everything you own, don’t say “I know what you’re going through,” because you really don’t.
You have to make it happen
You just can’t sit and wait for something to happen in this business. You have to make it happen. Years ago, we used to do homebuyers seminars, now we do investor seminars. This is how we actually make the business work for us. We present our portfolio and let investors know what’s available. We collect names and e-mail addresses so that when we get a listing that meets an investor’s criteria, we get in touch. Our investor seminars also attract home buyers who might be able to purchase the property with a 203(k)-rehab loan. So, our advertising says “investors and 203(k) buyers welcome.”
Work with REO buyers
When agents ask how to get involved, I say that it might not be involvement as the listing agent, but as a buyer’s agent. Working the buy side usually won’t get you the contacts with asset managers. But the agents I know who are strictly buyer’s agents for REOs like it that way.
Building Your Network
Asset managers need to know their listing agents better than the properties, because, with responsibility for a few hundred properties, the asset manager can’t possibly keep tabs on the details of every property. Depending on the size of the territory and number of properties, an asset manager will probably maintain a go-to network of 12–15 real estate agents on whom they can rely. In contrast, in active markets, real estate professionals need to cultivate working relationships with the asset managers at the companies that do most of the REO business in the market area. That handful of (3–5) asset manager contacts will be the source for most of your REO business.
Many of the major asset management companies, including the GSEs, enable online registration for real estate agents. Fill out the application and attach a résumé if possible. Some of the major asset management companies that provide REO outsource services for major lenders and the GSEs include:
- 24 Asset Management
- Atlas REO
- Advent REO
- First Preston Management
- Keystone Asset Management
- Old Republic Default Management Services
REO conferences, such as those sponsored by The Five Star Institute (www.TheFiveStar.com ) and REOMAC (www.reomac.com ), provide a place for outsource companies, asset managers, and real estate professionals to meet face-to-face and make network contacts. Attending a conference means an investment of time and money, but for some real estate professionals, the payoff is worth it in terms of education and contacts.
Educating the Buyer Client
In previous modules, we concentrated on the list side of the short-sale transaction—the role and responsibilities of the listing agent and how agents should take a short-sale listing. What are the buyer’s agent’s responsibilities in short-sale transactions? And what if the buyer client is interested in an REO property and not a short sale? Since the purchase of short sales and REOs are subject to different constraints, not all buyers are good candidates for both types of distressed transactions. Buyer’s representatives should counsel their clients on the differences between these types of transactions during their initial needs assessment. A counseling session not only sets parameters but also closes the potential gap between buyers’ perceptions and market realities. In addition to talking about needs, wants, price, and location parameters, buyers need to be realistic and understand what they could be getting into.
Whether the buyer is considering a short sale or REO property, these transactions share the following:
- Buyers must understand the process and realize they are not in control.
- Buyers must be willing to get pre-approved.
- Properties are sold as-is.
- Lenders/servicers will not approve an offer to purchase that contains a home-sale contingency.
- It can be difficult to get closing costs covered or cash back for the buyer.
- The worksheet and checklist later in this module can be used in addition to any standard buyer qualification worksheet currently used.