Understanding the REO Agent’s Business

            The real estate brokerage business appears confusing until you understand how real estate agents, Realtors®, and Realtors® who work with REO properties in particular, work together and make a living.  The term ‘REO' refers to bank owned properties, or ‘real estate owned' by banks or lending institutions.  These properties were acquired by the banks through the foreclosure process.

In many cases, REO properties can be purchased at a substantial discount.  Consequently, they are often in great demand by investors and owner occupants alike, generating multiple competing offers.  Multiple offer situations can be frustrating for all concerned, but less so with a basic understanding of the REO sales process, and the players involved.

Why Work With a Realtor®

            At a very basic level, it is important to understand the difference between a licensed sales agent or broker, and a Realtor®.  Every Realtor® is a licensed sales agent or broker in their state.  However, not every sales agent is a Realtor®.  Licensed sales agents and brokers may list and sell property for other people and be paid for their services.  However, sales agents and brokers who are not affiliated with the National Association of Realtors do not have access to the training and support that Realtors do, nor do they have access to the Multiple Listing Service(s) (MLS).  For purposes of this article, the terms ‘agent' and ‘Realtor' are used interchangeably.

            Real estate agents are independent contractors.  They are self-employed business people who work under the license of a real estate broker.  Their income is entirely based on the commission they earn.  They are not on salary and they do not get paid by the hour.  They pay all of their own expenses through an arrangement with their broker and they only get paid when a transaction gets to the closing table and the deed transfers. 

When a Realtor® lists a property, whether for a private individual or an asset management company representing a financial institution on an REO property, the Realtor's brokerage has a contract to market the property in return for a commission.  The commission is split into two parts, the list side and the sell side.  Because Realtors cooperate amongst themselves even though they are competitors, hiring a Realtor to list a property extends a financial incentive to every other Realtor in the community to sell the property.

Realtors Who Work With REO Properties

            The listing agent who works with REO properties accepts additional challenges and responsibilities working for a bank or asset management company compared to working directly with an individual property owner.  The REO agent is involved with the preservation of the property usually from the time the property is sold at Sheriff's sale throughout the time it is listed for sale.  Preservation duties include, repairs, clean outs, and re-keys.

Another challenge is there is seldom a single point of contact throughout the listing and sale process and most if not all communication is conducted through email and dedicated websites maintained by the asset management companies.  It is a regimented, cold, and impersonal process relative to traditional residential real estate sales.  There is also a substantial personal investment of time and capital because many times the listing agent or brokerage must pay upfront for maintenance and repairs and then seek reimbursement from the asset management company after the fact. 

The Players Involved

            The key thing to understand about the process of purchasing an REO property is that there are several entities involved above and beyond a buyer and seller.  While a listing agent works directly for a seller, more often than not an REO listing agent works for an asset management company which works for an institutional investor, bank, loan servicer or some other financial institution.  This adds a layer of complexity, and often frustration to the process of buying an REO property. 

1. Bank or Institutional Investor

This is generally the entity that holds title to the property.  It may however be the loan servicer.  The loan servicer is the entity contracted by the owner of the property to service the loan, i.e.: collect the monthly payments. 

1. Asset Management Company

This is the company hired by the bank or institutional investor to manage and sell the asset/property.  Some of the larger asset management companies are ServiceLink, Premier, Litton, and MCB. 

1. Listing Agent / Brokerage        

The local real estate professional contracted by the asset management company to maintain, list, market, and ultimately see the property to the closing table.

1. Selling Agent

The local real estate professional representing the buyer.  This person may also be the listing agent.    

1. The Buyer

            As evidenced above, the REO listing agent is right in the middle of multiple competing forces with conflicting agendas and goals.  Everyone in this process is either looking to make a living, or at the very least, mitigate their losses.  The number of participants in the process means that the time it takes an asset manager to respond to offers and counteroffers can vary from not only company to company but property to property.  Listing agents can influence the time line to some degree but they have no actual control over response time.

How REO Commissions Are Structured

            REO commissions are always structured so that all involved are encouraged with financial incentives to see a property to closing.   Most of the compensation up and down the line however comes from the list side commission earned.  REO listing agents generally are required to pay a referral fee back to the asset management company for the privilege of marketing the property.   This is how the asset management companies are compensated

 There is never a referral fee expected by anyone to come out of the sell side commission because procuring a buyer is what makes the process work.  This structure results in the sell side commission often being as much as 50% more than the list side commission.  The listing agent is therefore always motivated to sell a property themselves.  Aside from the immediate financial incentive, agents who produce qualified buyers that can close quickly on a regular basis can expect more work from their asset management company clients.

Conclusion

There has never been a better time to buy real estate than right now.  One of the main reasons is because of the REO and other forms of distressed property on the market today.  Banks are not in the business of owning real estate.  Once they have made the decision to get a property off of their books, they want to move quickly.  There are deals to be had.  A basic understanding of the process and players involved will help get them done. 

Chris McAllister is a Realtor® and Business Development Director for Real Estate II, Springfield, Ohio.  Chris can be reached at 937-390-3715.