5. Representing the REO Buyer
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REO Properties: Responsibilities, Education, and Opportunities
Your involvement in REO transactions could concentrate on representing
the buyer. There are certainly some advantages to working only with
buyers; for example, you don’t have to deal with some of the harsher
aspects, like occupancy checks, securing properties, or financial outlays.
Furthermore, buyer’s representatives often receive a larger share of the
commission and incentives. Avoiding some of the grittier aspects of REO
properties, however, doesn’t necessarily mean the buyer representative’s
job is easier.
As we learned in the preceding chapters, when buyers—home buyers or
investors—purchase REOs they need to be prepared for a different
character of transaction and so does the buyer’s representative. For
example, the buyer’s representative must be able to create realistic
expectations and guide the buyer through the deal.
Buyer Counseling: Shaping Expectations
Whether the buyer is an REO investor or home buyer, you can use your
core real estate skills to conduct a counseling session. 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. For example,
although it may be selling at a bargain price, a bigger property does not
necessarily mean a better one; a fixer upper may be cheap, but even
small fixes can add up. Remind buyers that REO properties are sold asis/where-is. As-is can range from not-too-bad to alarming. Viewing a few
properties may provide a needed reality check.
Buyer counseling is especially important for first-time investors. The real
world of the REO market is seldom like the infomercials and it’s doubtful
that “mom and pop” investors will become overnight real estate tycoons.
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5. Representing the REO Buyer
Why Do You Want To Buy an REO?
n Is your motivation finding an affordable
home? Investment? Fix and flip or rent?
n Are you more interested in bargain prices
or turnkey properties?
n Are you willing to take responsibility for
correcting code violations or hazards?
n Is it worth the investment of time and money
to do a fix up?
n Do you want to live in the neighborhood?
n Can you afford the repairs?
n Are you prepared financially and otherwise to
get involved?
n How much repair work are you willing to do?
n Do you have a reliable source for repair work?
n Are you counting on DIY or a relative
for repair work?
n If planning to rent, are you prepared
to be a landlord?
n Are you familiar with local landlord/renter
regulations?
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REO Properties: Responsibilities, Education, and Opportunities
A New Generation of Property Flippers?
Caution the would-be property flipper. Investors make their money on
the front end, buying low. Unless the property is in top condition (like a
deed-in-lieu), they will need to invest money to repair the property and
make it salable. What are the chances that they will make a profit on a fix
and flip when property values are flat or declining? Fix and rent or hold
may be a better strategy for realizing an income stream or eventual
profit.
Disclosures
Considering the hundreds of properties an asset manager may be actively
marketing, it isn’t possible to know all of the details about a particular
property. For this reason, asset management companies do not provide a
seller’s disclosure and the property is sold “as-is/where-is.”
However, known environmental hazards and any material defects found
in an earlier inspection (that caused the buyer to cancel the deal) must be
disclosed to the next buyer. In addition to federal regulations regarding
lead-based paint, state and city regulations may require certain point-ofsale inspections, such as for radon, mold, Chinese drywall, and termites.
When defects are found, the asset manager may agree to lower the price,
but likely will not approve a credit or provide cash.
Check the remarks in the MLS listing comments for any repairs that need
to be done to bring the property up to code or restore it to habitable
condition. Additional escrowed funds may be needed to cover the cost of
required point-of-sale inspections and correct problems. When point-ofsale inspections uncover issues that need to be corrected, a contractor’s
line item job estimate will likely be required (at the buyer’s expense) as
an addendum to the sales contract.
Protecting the Buyer
With a transaction environment so weighted in favor of the seller, what
can the buyer’s representative do to help bring the deal to a satisfactory
close? There are some steps you can take to help the transaction to an
on-schedule close and prevent a property’s troubled past from haunting
the new owner.
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5. Representing the REO Buyer
Protecting the Buyer
 Prepare and submit a complete offer


Confirm the buyer’s proof of funds.
Review offer documents to make sure all fields are filled in.
 Research the property condition and history



Look for outstanding violations, code issues, liens, or back
taxes— the foreclosure process should resolve tax liens.
Obtain up-to-date utility bills—the listing agent should resolve
unpaid bills in the process of turning on the utilities.
Recommend consulting an attorney to obtain an estoppel to
prevent a homeowner association from holding a new owner
responsible for back fees.
 Document property condition


Take date-stamped photos inside and outside.
Pay special attention to areas in need of repair.
 Set a feasible closing date




Don’t fill in an automatic 30-day closing if you’re not sure it can
happen.
Allow time to complete all of the point-of-sale inspections and
obtain repair estimates.
Allow time for loan approval, especially FHA 203(k) rehab
financing.
Allow time to complete the condo approval process.
 Keep on top of transaction deadlines



Schedule inspections per the terms of the purchase agreement.
Follow up with the title company and lender to ensure that liens
are paid and the title is clear.
Meet deadlines—a missed deadline can constitute breach of
contract and cause the asset manager to cancel the deal.
 Guide the buyer to financing sources and assist with repair
estimates



Provide contacts for 203(k) lenders.
Inform the buyer of grants and incentives—for example, HUD
Good Neighbor Next Door program.
Suggest contacts for preparing required repair estimates.
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REO Properties: Responsibilities, Education, and Opportunities
 Confirm the feasibility of the buyer’s plans for the property



Check owner/renter ratio of condo developments—are there
rental restrictions for investors?
Confirm that the property is zoned for the buyer’s intended use.
Inform buyers of criteria for 203(k) rehab financing.
 Encourage the buyer to assess liabilities and insurance coverage



Home warranty
Title insurance—protection against defects like unreported liens
Builders risk policy—for unoccupied properties
 Stay in touch with the listing agent


Monitor the status of offers.
Advise progress and warn of delays.
 Schedule a final walk through



?
74
Report damages or changes in property condition to the listing
agent.
Help the buyer negotiate a credit or price reduction for damages
occurring between contract and closing.
Use date-stamped photos as evidence of before/after condition.
Discussion Question
What additional steps could you take to guide and protect the
REO buyer?
5. Representing the REO Buyer
Practitioner Perspective
Shaping buyers' expectations
You have to set correct expectations from the start. One way is
to really know local statistics and explain them to buyers. We
only have a one-month supply of REO inventory. That means not
making a lowball offer because banks may be getting multiple
offers.
Leslie and John Carver
Prudential Americana
Group
Henderson, Nevada
[email protected]
Buyer misperceptions
The REO market and competition is strong. We have both
investors and ‘Mr. and Mrs. Home Buyer.” For regular
homebuyers, there's still a learning curve. Homes move quickly
and there's competition. Sometimes after a deal, I hear, "The
buyers would've paid $5,000 more, if they'd known." So
sometimes buyers really have to put their cards on the table and
make their best offer. They sometimes have to lose out on a
couple houses before they get it that they need to come in with
a strong offer.
REO investors versus homebuyers:
I see sophisticated investors who understand the market and write strong cash offers. Cash still
speaks.
Finding buyers
We get lots of calls because we have lots of listings. We also have a good client sphere with
people who are loyal to us. Many homeowners would be repeat buyers, but they're either
underwater on their current home or they can't qualify because lending standards are so strict.
What you need to know
 Keep up on market statistics so you can give the right advice.
 Get a home inspection. Scary things come up with bank foreclosures. In a vacant condo, we
found mold from floor to ceiling that was caused by a slow drip in the fridge line.
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REO Properties: Responsibilities, Education, and Opportunities
Negotiating
Although the thousands of REOs in the pipeline would seem to create a
buyer’s market, the sellers—lenders and their asset managers—are in the
driver’s seat. At times their decisions appear quite arbitrary. Most REO
transactions don’t involve a lot, or any, back-and-forth negotiation of
price or contract details. In fact, loading a contract with contingencies will
likely send it straight to the reject file. A buyer’s best leverage lies in
offering a cash deal and a quick close. For the asset manager, deciding
which offers to consider is strictly a bottom-line proposition based on the
potential payoff for the seller (the lender). And an asset manager’s job
performance is evaluated on the number of successful transaction
closings each month. Given a choice between a lower-price, quick-close
offer and a higher-price deal that may or may not close in 60 days, which
do you think the asset manager will choose?
For asset managers, selling the property is a bottom-line financial
transaction. An emotional letter to the asset manager appealing for
favorable treatment because the buyer “loves the house” offers no
negotiation leverage at all and could actually backfire. In fact, the
contract forms used by the listing agent and asset management company
do not allow space for these types of comments.
Finally, don’t expect hardball negotiations with listing agents to produce
favorable results. They don’t have a lot of leeway to make concessions.
The asset manager is in the driver’s seat and will reject or ignore an offer
that threatens to take up too much time and effort. Anything the buyer’s
representative does to make the transaction difficult for the listing agent
or asset manager jeopardizes the deal for the buyer.
Making an Offer
As noted earlier in the course, the essential elements of making an offer
on an REO property are:
 Signed purchase agreement
 Proof of cash funds or pre-approved financing current within the last
30 days in the amount of the offer
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5. Representing the REO Buyer
Submit Online
The workflow of REO transactions happens online, including submitting
an offer. Using the asset management company’s online template will
speed up communicating the offer and in a highly competitive market
speed can make all the difference. Fill in all of the form’s fields
completely and don’t leave anything blank or change anything on the
form. If an information item cannot be supplied, note this on the form.
Submitting the offer by e-mail makes it easier for the listing agent to
upload and forward the buyer’s offer onward. If you are still using paper
forms, now is the time to invest in a scanner and software for creating
PDF documents.
Show-Only, Reserve, and First-Look Periods
All offers may be rejected if submitted during an initial show-only period
or reserve/first-look periods for first-time home buyers or nonprofit
organizations. If the buyer falls into one of these categories, the reserve
period presents an opportunity to make an offer on an REO property
without competition from investors. Buyers must, of course, provide
proof of their eligibility. First-look and reserve periods vary based on
lender policy and types of properties; for example, HUD and the GSEs
support neighborhood stabilization programs by offering a first-look
period on many of their REO properties. Some cities now mandate a
reserve period for home buyers or nonprofit organizations and
community groups. When the MLS notes or online listings don’t provide
information on reserve, first-look, and show-only periods, ask the listing
agent for this information. Depending on the buyer, making an offer
during one of the reserve periods could provide a market edge or make
for a frustrating experience.
Yes, No, Maybe?
In a traditional transaction, the seller responds to an offer by accepting,
rejecting, or making a counteroffer. In contrast, the status of offers on
REO properties spans a range of gray areas. The best course of actions is
to refrain from informing a buyer of offer acceptance until the asset
manager communicates it in writing. Responses could be:
 Pending (submitted, no action)
 Verbal (by voice) acceptance, awaiting upper management approval
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REO Properties: Responsibilities, Education, and Opportunities
 Awaiting upper management approval
 Approved but awaiting submission of certain documents
 Accepted—in writing
 Request for highest and best offer (a counteroffer often indicative of
multiple offers)
 Rejected
 Try again—even rejected offers can find new life when a property
languishes on the market without any other better offers; the asset
manager may ask the listing agent to find out if the buyer is still
interested.
Multiple Offers
As noted earlier in the course, buyers will seldom know if their offers are
competing with others. The listing agent is not required to disclose the
existence of other offers and the seller (the lender) has the right to keep
this information confidential even if the buyer’s representative asks
about the existence of other offers.
No More Offers?
When several offers are pending, the asset manager may notify the listing
agent not to accept any more offers. Making an offer at that point will be
a frustrating experience for the buyer. If you made an offer and are
waiting to hear back, the change of status in the MLS to pending may be
the only clue that the buyer’s offer was refused or not in time to be
considered.
Accepted
When the asset manager accepts an offer, the response will come in the
form of a counter addendum. Read over this document carefully and
compare it to the buyer’s offering terms. This is the time to sweat the
details because asset managers may change or omit terms based on
upper management approval or refusal. But don’t expect to write in
changes on the counter addendum; markups invalidate it. Request
changes and corrections on a separate form.
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5. Representing the REO Buyer
Can the Buyer Switch the Source
of Funds?
Sometimes buyers will show proof of
cash—and present a letter from the
bank to back it up—but switch the
source of funds prior to closing. Instead
of depleting a bank account, the buyer
will hope to use the proceeds from the
sale of another property or obtain
financing. Switching the source of funds
violates the terms of the sales contract
and could be a deal killer—particularly if the maneuver delays the
closing.
FHA 203(k) Financing for Rehabs
Purchasing a home that needs substantial repairs presents a predicament
because a bank won’t approve a mortgage on a home until repairs are
complete and the repairs can’t be accomplished until the purchase
closes. The FHA 203(k) mortgage program offers a solution. The program
allows a buyer to purchase or refinance a property plus include in the
loan the cost of making the repairs and improvements.
203(k) Mortgage Basic Steps11
 A potential homebuyer locates a fixer-upper and executes a sales
contract after doing a feasibility analysis of the property with their
real estate professional. The contract should state that the buyer is
seeking a 203(k) loan and that the contract is contingent on loan
approval.
 The homebuyer then selects an FHA-approved 203(k) lender and
arranges for a detailed proposal showing the scope of work to be
done, including a detailed cost estimate on each repair or
improvement of the project.
11
203(k) Funds for Handyman-Specials and Fixer-Uppers, HUD.gov, http://portal.hud.gov.
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REO Properties: Responsibilities, Education, and Opportunities
 The appraisal is performed to determine the value of the property
after renovation.
 If the borrower passes the lender's credit-worthiness test, the loan
closes for an amount that will cover the purchase or refinance cost of
the property, the remodeling costs, and the allowable closing costs.
The amount of the loan will also include a contingency reserve of 10
percent to 20 percent of the total remodeling costs, which is used to
cover any extra work not included in the original proposal.
 At closing, the seller of the property is paid off and the remaining
funds are put in an escrow account to pay for the repairs and
improvements during the rehabilitation period.
 The mortgage payments and remodeling begin after the loan closes.
The borrower can decide to have up to six mortgage payments (PITI)
put into the cost of rehabilitation if the property is not going to be
occupied during construction, but it cannot exceed the length of time
estimated to complete the rehab.
 Escrowed funds are released to the homeowner during construction
through a series of draw requests for work that is completed. To
ensure completion of the job, 10 percent of each draw is held back;
this money is paid after the homeowner informs the lender that the
work has been completed and after the lender determines there are
no additional liens on the property.
Eligible Properties
 One- to four-family dwellings completed for at least one year
 Homes slated for demolition if some of the existing foundation
system remains in place for reconstruction
 Conversion of a one-family dwelling to a two-, three-, or four-family
dwelling or from four-family dwelling to fewer dwellings
 Residential portion of mixed-use properties (limits apply on extent of
nonresidential-use space)
 Refinance of existing liens secured against the property and rehab
 Purchase of an existing house or modular unit to move the mortgaged
property and install on a permanent foundation
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5. Representing the REO Buyer
 Interiors of condominium and townhouse units (Individual buildings
cannot contain more than four units; no more than five units per
condominium association or 25 percent of total units can be
undergoing rehab at any one time.)
Eligible Borrowers
 Home buyers, owner-occupants
 Local government agencies
 Nonprofit organizations
 No investors
Add Energy Efficiency
Rehabbing an REO home presents an opportunity for improving its
energy-efficiency and additional FHA financing can help. Under the FHA
Energy Efficiency Mortgage (EEM) program, a borrower can finance the
cost of certain energy efficiency improvements—in addition to the
amount approved for 203(k) financing.
The Fine Print
 To provide sufficient funds for the rehabbing, the mortgage amount is
based on the projected after-improved value of the property; the
lender may require an as-is appraisal, too.
 The portion of the loan designated for rehab improvements, including
a contingency reserve, is held in an interest-bearing escrow account
and released in a series of draws as work is completed.
 Each release requires a 10 percent holdback to cover possible liens.
The total of all holdbacks is released after a final inspection of the
rehab work and issuance of the final release notice.
 The borrower must use licensed contractors for the rehab work. Doit-yourself rehabs don’t qualify unless the borrower has the proven
expertise and experience (such as being a licensed contractor or
electrician) to perform the work competently. Do-it-yourself labor is
not compensated; only the cost of materials may be drawn from the
construction fund.
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REO Properties: Responsibilities, Education, and Opportunities
203(k) Streamlined
For rehab jobs of less than $35,000, a home buyer can take advantage of
the streamlined 203(k) mortgage program. The program simplifies the
process of gathering bids, inspections, and documenting completion of
completed work. When the planned repairs do not exceed $15,000, a
contingency reserve and final inspection to verify completion are not
required; the borrower can submit receipts as proof of completion. An
initial draw of up to 50 percent of the loan is permissible to cover the
cost of materials.
More Information
For detailed information on 203(k) mortgage programs, search on “rehab
a home with HUD's 203(k)”at http://portal.hud.gov.
Which Improvements Pay Off?
What improvements add the most value
to a home’s resale value? Every year the
National Association of REALTORS® teams
up with Remodeling Magazine to produce
the “Cost vs. Value” report which
compares average job cost for 35 popular
remodeling projects and cost recouped at
resale. For more information go to
www.remodeling. hw.net/2011/
costvsvalue/national.aspx
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5. Representing the REO Buyer
Brainstorming Exercise
What will you do…?
Take a few moments to think about (and make a commitment
to) action steps and goals.
 Check your broker’s policies
Tomorrow
 Research your REO market
 Make contacts
 Look at REO listings and properties
 Assess the competition
7 days
 Develop your contractor list
 Create a team member checklist
 Review key competencies
14 days
 Research and register for REO events
 Sign up for online newsletters
 Register with REO asset management
companies, workflow applications
30 days
 Prepare a resume
 ________________________________
 ________________________________
60 days
 ________________________________
 ________________________________
 ________________________________
90 days
6 months
1 year
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Resources
Resources
Traditional Versus REO Transactions ........................................ 85
Websites .................................................................................. 86
National Programs .................................................................... 87
Buying at Auction ..................................................................... 88
Bulk REO Sales......................................................................... 89
84
Resources
Traditional Versus REO Transactions
Traditional Transaction
REO Transaction
Seller
Seller
 Homeowner or investor
 Wants right price, favorable terms, timely closing
 Lender represented by asset management company
 Wants quick sale, bottom-line price, loss mitigation
Page 20
Listing
Listing
 Listing presentation to sellers
 Assignment from asset manager
Occupancy
Occupancy
 Seller vacates the property on/before closing
 Rental leases may transfer to the new owner or
terminate
 Foreclosure limbo, former owner/tenants continue
to live in property, eviction or cash for keys
 Vacant or abandoned
Property Condition
Property Condition
 Sale-ready condition
 Upgrades to enhance curb appeal and value
 Cash or credit at closing for repairs
 As-is, where-is
 At risk for vandalism and damage
 Possible price reduction to offset repair costs
Showing
Showing
 Staged and styled for appealing
Trash-out, broom-swept clean
Contingencies
Contingencies
 Negotiable between seller and buyer
 Property inspection, sale of current home, mortgage
approval, final walk though
 As-is, where-is
 Property inspection
 Final walkthrough
Offers
Offers
 Sales contract exchanged between seller and buyer
 Buyer offers earnest money
 Seller can accept, reject, counteroffer
 Seller signs final contract to accept
 Sales contract and proof of funds or pre-approval
 Seller can accept, reject, counter, ask for highest and
best, subject to upper management approval
 Asset manager sends counter addendum to accept
Negotiations
Negotiations
 Price, terms, closing date, contingencies
 Win-win for buyer and seller
 Price and closing date
 Bargain for buyer, bottom-line for seller
Disclosures
Disclosures
 Government-mandated disclosures
 Seller’s disclosure
 Government-mandated disclosures
 No seller’s disclosure, defects found in previous
inspections must be disclosed
Closing
Closing
 Negotiable; seller may agree to extend
 Buyer can specify title company
 Firm closing date
 Per diem charged for late closing
 Seller specifies title company
Page 38
Page 40
Page 52, 58
Page 57
Page 52, 72
Page 61
Page 62, 76
Page 63, 72
Page 65
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Resources
Buying at Auction
What can buyers and real estate agents do to increase the chances of making a successful
purchase at auction?
 Observe an auction
Start by observing one or two auctions firsthand. See what types of properties are selling,
price ranges, and condition. Auctions are public events; even registering does not obligate
you to bid on anything,
 Review sale terms
It is very important to understand the auction terms: type of auction, bidding procedure,
minimum bid, deposit and closing requirements, liens or no liens or encumbrances, and so
forth.
 Redemption rights
If the auction is a trustee or sheriff’s sale (last step to REO status), the former owner may
have the right to redeem the property after the sale. Offering the former owner a nominal
amount—usually less than $1,000—for the redemption rights cancels the redemption
period and prevents sale of the rights to another party. Buying a property at a trustee or
sheriff sale may also involve initiating a legal action to evict the former owner or a tenant.
 Inspection
If the seller allows a pre-auction property inspection, accompany the buyer. Even if the
property is not open for inspection, you can drive by, walk around the perimeter, and look
in the windows if it is vacant.
 Bidding strategy
Comparative marketing analyses (CMAs) on targeted properties help the buyer develop a
bidding strategy. Maximum bids should take into consideration potential repair costs and
the buyer’s premium added by the auction company. If a buyer loses out on a property, it
may be possible to make a post-auction offer to the winning bidder.
 Registration
Register the buyer with the auction company and register yourself as the buyer’s
representative. If offered by the auction company, a commission can be paid to a registered
representative, known as broker participation. Protect your compensation by obtaining a
signed buyer representation agreement before registering a buyer-client.
 Prepare for action
Make sure the buyer is prepared with the required deposit (usually a cashier’s check in the
amount of the minimum bid) and funds to close the deal. A buyer who wins the bid must
sign a sales contract on site and prepare for a quick closing. The seller sets the closing
date—usually 30 days—with no extensions or contingencies.
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Resources
Bulk REO Sales
Bulk sales make up a distinct part of the REO market, though one that most real estate agents
and small investors seldom experience. Bulk sellers bundle properties into packages—from 10–
15 to up to several hundred properties—for a quick cash sale. The properties are offered in bid
packages compiled by the seller or in custom packages based on a buyer’s specifications. A bulk
sales package, called a tape, may be assembled based on several criteria: type of property
(single-family, multi-family, commercial), performing or nonperforming loans, geographic area,
price range per property, price range per package, or percentage of BPO. The transaction
process, called a protocol, differs among sellers, but most deals happen in the following
sequence.
 The buyer establishes intent and qualification to participate by providing the seller with the
following documents:

Letter of intent (LOI)



Proof of funds (POF)
Signed master fee agreement (MFA) stating how parties will be compensated
Signed non-circumvent, non-disclosure (NCND) agreement to ensure that no one is cut
out of the deal and details remain confidential.
 The seller provides the tape—a spreadsheet list of properties. The buyer has 24–48 hours to
inspect the tape to confirm that the properties fit criteria. The buyer accepts the tape by
making a deposit, customarily 10 percent.
 Following acceptance, the buyer has a 2–3 week due diligence period in which to vet the
properties which are sold as-is and without contingencies.
 Closing on the entire package occurs within 1-2 days after the end of the due diligence
period. The buyer wires the balance of funds to the seller. Deal participants are
compensated according to the terms of the master fee agreement.
Throughout the transaction the buyer is represented by a buyer’s mandate and the seller by the
seller’s mandate. Others involved in bringing the buyer and seller together are termed
intermediaries and multiple intermediaries are called a chain. Compensation for the buyer and
seller mandates and intermediaries is paid according to the terms of the master fee
arrangement and is added to the purchase price. Although compensation percentages may be
only a fraction of a percent, on a multimillion dollar deal the actual amount of compensation
can be quite large.
To get an idea of the extent and workings of the bulk REO business, just type “REO bulk sales”
into your Web browser. Or check out bulk sales on the websites for Fannie Mae, Freddie Mac,
and HUD.
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