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Long, Slow Burn In Foreclosure Properties

There is no shortage of short sales and bank-owned (REO) homes in markets across the country, and it’s likely going to be a “long, slow burn” to work through this inventory of distressed properties, said Paul Jackson, publisher of HousingWire and REO Insider.

By most measures, REO activity was fairly steady in 2009 compared to 2008, said Jackson, speaking during a discussion on “Breaking into the REO Club” at the Real Estate Connect conference in New York City last week.

And while some analysts have tossed out staggering numbers about the so-called “shadow inventory” of foreclosing and foreclosed homes that will hit the market, he said he expects a continuing steady flow rather than a tidal wave.

That’s because there are government programs that are intended to check a rush of new foreclosures, he said. Also, as noted by speakers in an earlier conference session, financial companies would prefer not to take a hit on their balance sheets all at once by releasing a flood of distressed properties to market.

FirstAmerican CoreLogic, for example, has estimated a “shadow inventory” of 1.7 million homes at the close of September 2009, a rise from 1.1 million at the same time in the previous year, while the “visible inventory” dropped from 4.7 million at the end of September 2008 to 3.8 million at the close of September 2009.

There will be opportunities for real estate professionals to work with distressed properties for some time, Jackson noted.

“For those of you looking to get into the space, now is a pretty good time,” he said. “REOs and forelcosures are now an organic part of the real estate market — they’re no longer a niche.”

Of course, that doesn’t mean it will be easy. Jackson and other panelists noted that it takes a lot of time, effort and organization to deal with distressed properties. And the rules are changing.

Broker price opinions (BPOs) — which are valuations of properties by real estate agents or brokers that are ordered by lenders and loss mitigation companies when an appraisal is deemed unnecessary — are not necessarily a gateway for real estate professionals to get REO listings these days, for example, said Jackson.

And brokerage companies may find that it’s better to have separate, specialized departments to handle BPOs, REOs and short sales these days, as each requires a particular skill set.

Panelists also noted the alphabet soup of companies offering foreclosure certifications and training and conferences and the difficulty in breaking in with lenders and servicers in the first place. They cited as a provider of a distressed-property training that is required by several major servicers.

Panelists noted that it can take a heavy investment — perhaps $5,000 per property — to handle all of the tasks associated with REO properties when serving as a listing agent.

Marie Chung, director of REO and foreclosure services for REO Modern Realty Corp., that offers brokerage and other services, emphasized the importance of a subtle and persistent approach to getting a slice of action in distressed properties — being overly pushy in your networking approach can backfire, she said.

“This is not a science — it really is an art. Breaking into this business is networking, persistence, and once you’re in it’s all about keeping the business.”

Networking means “truly understanding the REO industry itself,” she said. “You need to understand how it works and who the players are.”

Companies will likely have different processes and points of contact for agents, she noted, and that requires some homework on the agent’s part. Agents may be in contact with asset managers, pre-marketing representatives and closing coordinators at various companies for various aspects of the transaction, for example.

Chung’s company has 18 people on payroll, and its operations differ from that of a typical real estate brokerage company. The deals may not be as lucrative as standard transactions, she noted, and those who list REOs must bring a lot of money and expertise to the table.

In some cases, Chung and other panelists said, reimbursement for some of the many tasks performed in selling distressed properties may be delayed … or it may never come. And delayed utility bills that show up late in the sales process are a definite problem, she said.

Beth Butler, a panelist who is owner and consultant for Bigmouth Consulting, a real estate consulting firm based in Miami, said that it’s inevitable if you work with REOs that “you will end up out money, but sooner or later hopefully you’re making enough to cover” those expenses.

Jackson said real estate professionals who work with REOs are expected to be more hands-on with properties these days, too, and must identify and manage needed repairs, for example, while handling occupancy issues and filing regular reports with the servicer.

“(Servicers) are looking for agents who can bring more to the table than just (the basic) criteria,” Jackson said, which means community involvement and specific knowledge of local codes and ordinances can give agents a leg up on their competition.

“You are their local representative in their market. Someone who is connected to that city, knows what is happening in that city and has a civic-minded mindset,” he said.

Chung also stressed the importance for agents and brokers handling REO properties to be the steward for all actions related to that property.

“You are ultimately responsibility for the property. This is your asset, so treat it like your own,” she said.

In an earlier conference session focused on foreclosures, participants noted delays in banks bringing distressed properties to market and signing off on short sales.

Rick Sharga, senior vice president for RealtyTrac, a distressed-property data provider, said that “one of the fallacies of short sales … (they) force the bank to take a loss today.”

That panel’s moderator, Jonathan Miller, president of Miller Samuel Inc., a New York City real estate appraisal firm, said such deferred losses on bad or souring loans is sometimes referred to as “extend and pretend,” delay and pray” or even, “a rolling loan gathers no loss.”

Short-sale expert Philip Tesoriero of Gelip Inc. Consulting, during a separate conference session, hammered home the need for agents to have a compile a comprehensive package of documents in getting short sales closed.

Many agents have complained that short sales too often lead to delays and failure, and Tesoriero said that common reasons for rejection: the purchase offers are far too low, sellers fail to qualify to engage in a short sale, and the paperwork may be insufficient.

He recommends that agents prepare a list of materials to help close the deal, including a hardship letter, sales contract, tax return form, proof of finances for buyer and proof of income and assets for the seller, among other documentation. A written offer letter, a broker’s price opinion, a “carry cost analysis” that compares the costs associated with a short sale versus the cost of allowing the property to foreclose, and a 4506 T form — a tax form that is useful for gauging a borrower’s creditworthiness — can also be beneficial in seeking short-sale approval, he said.

“I’ve got to assume that there’s a human being on the other side. I try to send them a very detailed cover letter that explains the hardship, explains that these people are very motivated,” he said.