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The Best of Times and the Worst of Times: The 2009 REO Market

(Article includes comments by Ann Stickel, VP of Affiliate Services for Michael Saunders and Company)

Photo Credit: DSNews.com

Photo Credit: DSNews.com

The Best of Times and the Worst of Times: The 2009 REO Market
By Rick Sharga

It wasn’t all that long ago that veteran REO agents and brokers were wondering if they should be pursuing another line of work. Through the early part of the decade, foreclosure activity was at below-average levels, properties that entered the foreclosure process seldom made it as far as the foreclosure auction, and properties that made it as far as the auction were generally purchased by eager investors. As a result, very few properties became REOs, and business for REO specialists was scarce.

As it turns out, that scarcity was driven by unsustainable home price appreciation, a voracious consumer appetite for real estate investments, a seemingly endless supply of fresh capital from Wall Street and institutional investors, and lending practices that threw caution to the wind. These same forces which, through the first half of the decade, kept REO activity artificially low, eventually led to an explosion of REO activity the likes of which the industry had never before seen, and which – unfortunately – it was ill-prepared to handle.

After seeing almost 201,000 REOs in 2005, the last year before the current wave of foreclosure activity began, REO counts have spiraled upwards at a remarkable rate: Over 268,000 REOs in 2006, almost 405,000 in 2007 and nearly 862,000 in 2008. In just four years, the volume of REO activity has more than quadrupled, far outpacing the servicing industry’s ability to deal with the volume. And 2009 is on pace to set another record.

Bank properties are no longer scarce, and they’re no longer a hidden commodity. In many of the harder hit markets, especially in states like California, Florida, Arizona and Nevada, it’s not unusual for bank properties to make up more than 50% of all existing home sales. In metropolitan areas like Stockton, CA and Las Vegas, distressed properties – primarily REOs – have accounted for as much as 85% of resale activities during the first six months of 2009. Consumer interest has never been higher, either. In a recent Harris survey conducted for RealtyTrac and Trulia, almost 60% of homebuyers said they were considering the purchase of a foreclosure property.

So from an industry perspective, there’s been a dramatic shift over a relatively short period of time: From virtually no inventory to an overwhelming flow of highly sought-after properties, all being pursued aggressively by motivated buyers. Unsurprisingly, agents and brokers who previously wanted nothing to do with foreclosure properties or REOs are now champing at the bit to get their piece of the pie. What might have been a boom for REO specialists has instead become a feeding frenzy for listings.

Servicers, meanwhile, have their own set of problems. While a handful of firms started hiring and training staff in anticipation of a wave of foreclosures, no one was fully prepared for the tsunami that hit. And the economic devastation that followed the housing market meltdown has added to the challenge by disrupting operations among some of the largest servicing firms in the industry. The disappearance or absorption into larger companies of major financial institutions like Washington Mutual, Lehman Brothers, Wachovia, Bear Stearns, Merrill and Countrywide has reduced the number of servicing organizations. Bank failures, mergers and acquisitions have further reduced the number of servicing organizations and displaced many of the seasoned professionals with the most experience in loss mitigation and REO asset management. Those who remain have been overwhelmed by the sheer volume of foreclosures, and the rapidity with which these foreclosures have taken place.

One of the most obvious delays caused by the high levels of REO activity has been in the disposition of these properties after they’ve been repossessed. While in a more normal market environment REOs are processed and posted for sale by an agent within 30-45 days, an analysis done by RealtyTrac in the fourth quarter of 2008 showed that only 31% of the REOs processed over the past year were listed on the MLS for sale. Whether these delays are due to title issues, extensive repair work, the sheer volume of homes to be processed, or accounting practices (since there’s generally no regulatory requirement to write down the value of an asset until the ultimate resale, there are potentially some accounting benefits to deferring the loss to a later date), the lag time has in effect created a “shadow inventory” of hundreds of thousands of unsold REOs and caused a great deal of stress in the real estate ecosystem.

Potential homebuyers, unable to make offers on properties they are interested in buying, grow more and more frustrated. REO agents and brokers in markets where bank homes are selling briskly are frustrated due to slow delivery of new inventory. Agents and brokers looking to acquire REO listing business see the unsold, unlisted inventory and wonder why the lenders don’t simply increase the number of agents to which they’ll assign properties.

If all of this sounds like a market in utter chaos, it’s not a coincidence.

The sheer volume of REOs in today’s market – and the avalanche coming in the foreclosure pipeline – have stressed asset managers, real estate brokers and agents, and the systems and processes they use to the breaking point and beyond. The challenges now go beyond the traditional questions of how to stage and market REO properties to make them competitive with traditional resale homes.

What’s different about today’s market than previous foreclosure cycles? What makes one REO broker or agent better than another? What should an REO agent or broker look for in an asset manager? How can asset managers help their brokers and agents more successfully move properties?

To get a real world perspective on these issues, we interviewed a number of industry leaders – REO veterans whose companies are succeeding in today’s market: Mary Lee Blaylock, President of Home Services Relocation in Minneapolis; Todd Mobraten, COO of US Real Estate Services in Lake Forest, CA; Tom Oldefendt, President of Asset Management Servicing II in Newport Beach, CA; Nick Salamone, President of Keystone Asset Management in Lansdale, PA; Ann Stickel, VP of Affiliate Services for Michael Saunders and Company in Sarasota Florida; and Staci Saunders, Director of Business Development, Hudson & Marshall.

A few key themes emerged: Communications. Timeliness. Experience. Everyone acknowledged that today’s market is significantly different than previous foreclosure markets, with fewer people trying to manage more properties amidst utter chaos. There was a general consensus that pricing was a point of contention, and that current market conditions were exacerbating the situation. But all agreed that establishing a relationship based on mutual respect and a shared vision were keys to success.

What should an agent or broker look for in a good asset manager?
(Nick Salamone) A good asset manager will be someone who is highly effective in written and verbal communication with strong organizational skills and the ability to multi-task.  An experienced asset manager will also be very familiar with the industry and have a strong working knowledge of REO.  They should also be very skilled in analyzing issues and be able to resolve any problems in a timely manner.

(Mary Lee Blaylock) I believe that the role of an asset manager is to work very closely with the assigned broker and agent to ensure a property is secured and on the market in the most expedient manner possible.  The asset manager needs to know what to coordinate and in what chronological order, but should not take over the role of the real estate agent.  Rather, enhance the process.

(Staci Saunders) A good asset manager communicates and works as a team member with the agent. Working together by discussing list prices, offers, reports repairs and marketing strategy can really make a difference. Communication with the agent vs. at  the agent is key. Good asset managers should also be familiar with the state and local area specifics or at least talk to the agent about specific requirements. A bad asset manager never returns phone calls and/or e-mails, doesn’t review the BPO or monthly report for pricing or marketing strategy, and doesn’t respond to offers in a timely manner.

(Tom Oledfendt) An agent or broker should expect to get promptly returned phone calls, answers to any offer within 24 hours max and good and frequent communication.

Ann Stickel: A good asset manager will turn their inventory over to a very well qualified broker to manage from soup to nuts on their behalf. Banks are not in the business of selling real estate, they are in the business of financing real estate. We have found some lenders who would like to straddle that fence and work on the marketing aspect as well as owning the asset……this is about as successful as a FSBO – it’s just not nearly as effective or strategic as turning the sales and marketing over to someone who specializes in real estate.

(Todd Mobraten) To have the asset manager detail their expectations and guidelines in detail. That last thing you want to do is learn the process for that asset manager as you go.

What distinguishes a good broker or agent from a bad one?
(Tom Oldefendt) Asset managers should look for agents and brokers with a positive attitude, knowledge of the industry, the ability to meet timelines and deliver results. Ethics, performance and loyalty are all important attributes.

(Todd Mobraten) Communication, communication, and communication is the key factor in distinguishing an agent from bad to good. An agent who communicates in a timely manner as well as through the correct channels always proves to be more successful. Many times the information delivered by the agent is not good news or what the asset manager wants to hear, but it’s the responsibility of the agent to deliver it and own up to any mistakes. When adding agents to our network, we are looking for agents with a solid business plan and capacity to execute our expectations. We want assurance they have proper communication skills, experience, resources, and cash flow to float necessary expenses.

(Nick Salamone) It’s extremely important to provide ongoing communication with the Asset Manager.  Brokers/agents who routinely make contact are highly valued.  In addition, meeting the required timelines and providing clean, accurate data are also critical elements for any broker/agent.  Brokers/agents who are inexperienced, do not know the market and are hard to reach will not rate favorably in today’s environment.

(Mary Lee Blaylock)  I would encourage asset managers to talk with the local broker’s REO division and rely on their firsthand knowledge of their companies’ agents to find the best fit.  This also assists in holding that local agent accountable for the items that they have promised in the upfront BPO marketing plan.  The best fit of an agent in one location may not be the same fit for a location in close proximity.  Ask the brokers of the agents to provide input into the area expert and do not overload one agent.  The increased workload of one agent may decrease the results desired.

(Staci Saunders) I would advise the asset manger to look for the following in a potential agent:

-REO experience—RETAIL is a different animal
-Knowledge and staffing to handle the property management and financing of the float required to pay the bills up front.
-Ability to communicate
-Knowledge of the REO market and ability to forecast pricing
-Knowledge of various loan programs and what qualifications are needed to obtain such financing
-Knowledge if a house can obtain certain types of financing. ie.. FHA/VA, 203K
-Sample of marketing and advertising provided
-Ability to handle volume and multiple offers
-Have legal support—E&O and a reputable company

What do you look for when bringing an agent into your network?
(Tom Oldefendt) I look at their track record, reputation in the industry and knowledge of different REO systems. They need to have their real estate license and E&O insurance in place. We look at agents based on their coverage area and we check their references.

Ann Stickel: We require our associates to attend an REO training class and be able to demonstrate that they can meet the needs of an effective REO agent such as satisfactory valuation of properties, ability to be a point person for the re-keying, repairs, and general maintenance that our centralized platform will coordinate on the associate’s behalf. An REO qualified associate must be able to meet each transaction on a more “business” perspective and less “personal or relationship” perspective. REO properties are not always in the most favorable areas of town so the associate must be comfortable with the market areas they may receive a REO referral. We have found that our associates who have come from a business or corporate-like background tend to be the better REO associates on our team.

(Nick Salamone) Experience is certainly on the top of the list. Agents and brokers with REO experience know the drill.  They know what is expected and most of all they know they need to be flexible as a result of client requirements. As the market continues to be flooded with inventory, the industry puts tremendous pressure and volume on experienced agents/brokers and we need to look towards second line players. These second line players have a tremendous opportunity.  Their real estate knowledge and experience play a big role, and gaining their commitment “to do what it takes,” is key.  Also important is the use of technology.  Agents/brokers must have the ability to navigate our system and be comfortable with the web-based technology that’s out there.

What’s different about today’s market compared to previous foreclosure cycles?

(Nick Salamone) It’s obvious the market is going through some challenging times right now.  With all of the moratoriums imposed by the banks and the president’s Homeowner Affordability and Stability Plan, the market has slowed down and is very lean at the present time.  Asset managers and brokers/agents must be very aggressive in how these homes are priced, in an effort to get them sold.   Most homes won’t get top dollar as in previous markets.  And brokers/agents must be particularly diligent in finding some real qualified buyers to purchase these homes.

(Mary Lee Blaylock) There is a unique balance between assisting a consumer in finalizing a great deal for them and assisting the banks in obtaining the best price for a property in the least amount of time.  The importance for each party is extremely different yet pertinent.  The difference in today’s foreclosure market versus those of the past is simply volume.  The total affect of this increased volume remains to be seen.  Once a stabalization in most or all markets occurs, then we may have a better chance at recognizing the total affect.  Until then, head down and move the real estate.

(Staci Saunders) There are outsourcing companies, preservation companies, portals, and technology that was not here in the past. No more gluing pictures to paper for BPOs and sending them overnight to asset managers. Former owners/occupants are more savvy about how the system works, staying in properties longer than before. There’s more use of auction companies to sell assets directly and to work with agents and outsourcers to successfully sell the assets. Asset managers have larger volumes of inventory.

Agents now are becoming involved with collecting rents, the eviction process and property management. Sellers are more often hedge fund companies than in the past. Some Sellers are now selling their assets occupied, and some are not discounting commissions.

(Todd Mobraten) Every foreclosure cycle has some level of evolution. The current cycle has evolved more than ever, particularly in the rules of engagement. Congress and state legislations are constantly changing the rules and setting new mandates that confuse the entire foreclosure supply chain. The end game results in longer timelines and higher costs to all players involved.

(Tom Oldefendt) The main difference is that in the past, market inventory just hit all at once, where today everything is in a holding pattern. In this cycle, values and loan amounts are greater, and there is a bigger supply and demand.

Ann Stickel: Foreclosures used to be much more socio-specific – lower end, struggling neighborhoods, etc. Today, foreclosures are prevalent across all price points, market areas and social circles. The stigma of the financial loss tied to a foreclosure is so much more socially acceptable today. I think it will definitely have a long term impact on how these failed transactions are evaluated from a credit profile perspective.

Associates that may have had no desire or interest in working with foreclosure inventory are much more open to doing so – one reason is that these properties tend to generate a great deal of buyer interest so you can position yourself to a larger pool of buyers that may also be equally interested in a well-priced non-distressed property.

What can asset managers do to help their agents and brokers successfully move properties?
(Mary Lee Blaylock) Professionally and honestly communicate the agent’s local market information to the banks or decision-making party.  The reality of what a property may sell for, although it can be a harsh reality message, will result in a more expedient resolution to the loss that the banks are inevitably going to experience.  Holding the agent accountable to the promised marketing plan is also a key driver in the successful sale of a property.  Be an ally to the agent and work “together” to move the properties.

(Staci Saunders) Asset managers could make a phone call to the agent prior to listing to discuss the client’s expectations, marketing strategy and any red flags that all should be aware of. Pricing the property properly is key and reviewing offers instead of just accepting the highest offer. Today agents are bidding high knowing the property will not appraise and negotiating afterwards. If asset managers discuss the pricing with agent you can try to eliminate some of this fallout due to multiple offers and over bidding. If there are repairs needed, addressing these quickly would be very helpful. Asset managers could also let the agent know which form of communication they prefer and what hours they work.

(Todd Mobraten) Do a better job in communicating changes, as well as offering up educational courses on their particular process.

(Tom Oldefendt) Be available to answer questions, offer training, return all phone calls, and meet their agents in person.

Ann Stickel: Asset managers could offer the greatest help by listening to the feedback that they receive from their agent and broker when it comes to pricing the property, offering incentives, repairs, maintenance and staging when needed. Asset managers are pulled from two different sides – their loan committee telling them to maximize their return on the loss and the real estate associate demonstrating that the market can’t support that particular price – and price is key right now. We hear from lenders that they’ll prefer to leave the price a bit higher and wait for an offer; but if you’re priced out of the market, you’re not going to get an offer.

(Nick Salamone) It is more important than ever for an asset manager to effectively manage the properties in his or her portfolio and work closely with the agent to ensure they’re sold in a timely manner — and for the highest possible price.  As part of this process, the asset manager cannot waste time in getting these properties on the market once values are verified.  The asset manager should review all marketing strategies submitted by the agent to ensure they are completing the appropriate tasks.  This includes the broker/agent submitting their monthly marketing report on a timely basis so the asset manager is kept informed of the situation and can respond accordingly.

Rick Sharga is Senior Vice President of RealtyTrac.

  • User Gravatar Matt Griffin
    September 24th, 2009

    For sure the REO Market is unstable. The situation is hard for all the market and the point is to know the best time to invest, enjoying the right moment, the positive one. Good post.

  • User Gravatar Larry Kaizen
    October 4th, 2009

    I want to applaud all of the contributors who provided such accurate, informative and helpful information. Some info came by form driven material and some simply through conversation. Again, in it’s totality, the column has good value. That said, in all of the material used, both verbal and written, I never heard or read any specific reference to actual curative work, and the extreme need of the asset managersto either perform the tasks or delegate the samein order to cure a potrntial lien which ultimately will lessen Seller’s proceeds.i am a firm believer that as long as we are involved in a real estate closing transaction, as a title company and/or seller’s rep company, all of the pieces must work together to reach the ultimate goal of a timely closing. Municipal liens and the like take quite some time to resolve. Are not the asset managers on the scene precontract and wouldn’t it be beneficial in reaching the ultimate goal if they assisted in the clearing of said issues and others like it…essentially assist with curative?

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