By Bridget McCrea
A quick perusal of the daily headlines reveals an alarming trend within the real estate sector: consumers who purchased homes in the last few years via simplified mortgage approval processes are losing – or, coming close to losing – their houses to foreclosure. Throw in an uncertain economy and the implosion in the subprime market and the end result is a need to service these consumers, hence a business opportunity for Realtors® who know the ropes of foreclosures, short sales and real estate-owned (REO) properties.
Ed Ramey has been working on deals involving distressed properties for many years, and for the last 18 months also has become involved with more real estate auctioneering. “You don’t want to see me standing on your front lawn,” says Ramey, a Realtor®-associate with Coldwell Banker Residential Real Estate in Plymouth. With 31 years of real estate experience under his belt, Ramey says his company is currently working with a handful of homeowners who are in the foreclosure process.
The Needs to Know
According to the latest statistics, foreclosure rates are on the rise in most states across the nation. Massachusetts hasn’t escaped the trend with the number of foreclosure actions through the third quarter of 2007 nearly triple the prior year’s numbers, according to The Warren Group of Boston. Therefore, Realtors® who know how to work this “new” market will provide much needed customer service and have success in this niche market.
Linda Kody has been following the state and national trends closely, and started training agents in her four offices on the fine points of short sales and real estate owned properties (REO) properties. In real estate since 1985 and broker-owner of Kody and Company in North Andover, she says “We’re spending a lot of time educating our Realtors® about what short sales are, how to work with the banks and how to handle traditional sellers who need to sell their properties, and who may be unrealistic about what asking prices the market will bear,” says Kody, who experienced a similar real estate environment in the 1980s, which were characterized by economic recession and high interest rates.
“Most of today’s real estate agents have never lived through this.” But she adds that once agents are educated on the foreclosure and short sale process, while seeking ways to help the seller relinquish the property, the result will be a one-time sales commission for the deal in question and future referrals for the agent who takes the time to ensure that the deal works out as favorably as possible for the seller.
The Seller Options
In a more perfect world, Ramey would be working with more short sales, a process that takes place in lieu of foreclosure and that finds lenders taking less than the total outstanding loan amount in exchange for the home. For that to happen, he says owners must surrender bank account statements and other documents that show the need for a lower payoff amount. Then, once the short sale is identified, the Realtor® should disclose it in the MLS. Some use “subject to third-party approval,” to indicate that the bank must approve the contract before it is closes. Some short sales are approved prior to the listing, some when an offer is received.
“If the lender agrees, we reduce the price and hope to sell before foreclosure has to take place,” says Ramey. The homeowner who owes $300,000 on a mortgage, for example, may negotiate a payoff of $250,000 and be able to list the home for the latter amount in order to get it sold.
Lenders often prefer a short sale if possible to avoid the costly and timely process of foreclosure action (which in Massachusetts takes about three to five months and costs a lender thousands of dollars) and further avoid taking a property into its REO portfolio.
There are several important points to keep in mind regarding short sale negotiations:
• When preparing the listing agreement, clarify the scope of representation.
• The lender may seek a reduction from all parties including the broker and any cooperating broker (absent such an agreement, neither broker is obligated to reduce the commission amount).
• The broker should recommend that the seller consult both a legal professional and a tax professional and document that recommendation so no legal or ethical questions can be raised.
• Obtain a specific approval from the seller to list the property as a short sale to avoid potential ethical concerns related to disclosures.
• Clarify the broker’s role in dealing with the lender to avoid a delay of the sale.
• Obtain the seller’s agreement to cooperate completely with required documentation and deadlines.
Kody is currently an instructor on loss mitigation at the North Shore Association of Realtors®) and also has taught MAR’s new Loss Mitigation Certification program which provides information and guidance on all the issues surrounding properties facing short sales and foreclosures.
She explains that through these classes, agents learn about the nuances between different lenders. Larger entities may have processes and people in place to handle the growing numbers of foreclosure properties while smaller lenders are less predictable and not quite as structured.
To get paid for their services during a distress sale, Kody says Realtors® must negotiate their commissions upfront, with the seller. During the first contact, the homeowner should be asked for a “net sheet” or other documentation that shows that the home is a candidate for a short sale. If that information isn’t revealed – and if the home was bought within the last few years – then the agent will want to ask if there could be a possible foreclosure and/or short sale in the cards.
“It’s not an easy question to ask, but it will behoove you to find that out earlier, rather than later, in the process,” says Kody. When listing a short sale property, agents are compensated through the traditional commission structure. Making the agent intervention particularly attractive for lenders, Kody says, is the fact that foreclosing on a home is a very expensive proposition for lenders in Massachusetts.
Going Once, Going Twice
Auctions have also gained in popularity in the last year, according to Val Gehringer, national auction coordinator with Home Land Auctions in Purcellville, Va. and also an instructor with MAR’s LMC course. In fact $14.3 billion in properties were sold in 2006 via the auction process (according to the National Association of Auctioneers) – a number that’s sure to increase as foreclosure rates go up.
A real estate auction is an alternative method of selling real estate. Unlike a foreclosure auction, which is an auction conducted by a lender who has assumed the home, some consumers choose to sell their home via auction rather than the traditional listing agreement. Realtors® have opportunities on both the buying and selling side of non-foreclosure auctions.
Non-foreclosure auctions are viewed as smart investments because properties are sold through competitive bidding and usually purchased at fair market value. Buyers are in the driver’s seat, Gehringer says, and are forcing homeowners who are in need of a quick sale to accept lower offers for their houses. “That’s where I come in,” says Gehringer, who sees opportunity in the auction sector for knowledgeable agents.
Agents can provide services in a non-foreclosure auction process to the auction companies such as performing marketing analyses, previewing open houses, fielding calls and showing the property. Additionally, Realtors® may refer clients to auction companies or bring a buyer client to the auction.
Ramey says that the field can be confusing, and recommends that agents may want to look into holding an auctioneer’s license. For non-distressed property, almost all auctioneers will pay an agent a set fee for bringing a buyer to the property. A broker may also be compensated for a referral of the listing to the auction company and for the assistance of services such as showing the house, coordinating inspections and assisting the setup of the closing.
The REO Broker
Ramey also sees opportunity for Realtors® in the REO sector, properties that are owned by a lender as a result of a foreclosure or deed in lieu of foreclosure. The key to success in that market, he adds, is to build up a client base of banks that “know you can perform as an agent.” The majority of properties in a typical lender’s REO portfolio are those acquired by the lender at the foreclosure sale. There are several responsibilities unique to a broker representing the lender in a sale:
• In many instances where costs are incurred during representation, the REO broker will be asked to disburse funds from the broker’s own account and then bill the lender.
• The REO broker can expect to encounter eviction should the property remain occupied after foreclosure.
• Once the property is vacated, the REO broker may be responsible for overseeing trash removal and maintenance of the property prior to listing.
REO sales are risky for listing agents as you may invest time and money marketing the property only to have it either sold at auction or terminated. To ensure you obtain a commission for your work, it is recommended that listing brokers gather succinct lender contact information, read your referral contract carefully and stay aware of listing agreement terms, particularly disclosures, listing deadlines, utilities activation and right to cancel specifications.
Once you begin working as a REO broker, one of the most challenging aspects is finding a way to add yourself to the lender’s “approved list” for future listings. There are a number of lender websites and contact lists found by entering a lender name and “REO” in Google and by visiting the national REO organization member sites that may provide some opportunities to make connections and obtain listings.
In any type of distress situation, says Gehringer, the best role an agent can play is trusted advisor, despite the fact that banks and lenders may take a tough stance against the homeowner. “Owners are usually dealing with loss mitigation professionals who have zero authority and zero personal concern,” says Gehringer.
Those agents who opt to work in the short sale, foreclosure, auction and/or REO market, and learn the ropes of this market segment, will have significant opportunity over the next few years as the market continues to come down to earth.
The Auction Option
Auctions are an excellent opportunity to call clients to action and secure your commission. Proven as a method for selling real estate in an accelerated time frame at true market value, clients aren’t concerned with how their property gets sold, but rather how quickly it’s sold and for how much. With as little as six weeks from consignment to auction, and a typical closing within forty-five days, you can be less than three months away from a pay day.