Marketing property in the face of foreclosure means marketing on a short timeline that ends with the client losing control of the property. Since the property is in foreclosure, the seller’s distress is public. These factors argue in favor of below market pricing. Such pricing should be carefully documented so that it is clear the decision was an informed one made by the seller. That means a good CMA/BPO and written documentation of how the listing price was established. Written documentation, whether in the form of emails or client letters or more formal pre-printed documents, showing how pricing was determined is the first step in disclosure for risk management purposes.

Pricing documentation may raise the issue of a “short sale” if the listing price is near or below the seller’s payoff. If a short sale is a possibility, short sale disclosures should be made as soon as the listing is taken. Click here for a detailed discussion of short sales and short sale disclosures. Property priced to move quickly to avoid foreclosure can also raise multiple offer issues, even in a down market. Therefore, it is a good idea to have talked to the seller about multiple offers and have a plan for how they will be handled already agreed upon. It is absolutely critical that the buyer’s agent explain multiple offer issues to their client, and document having done so, as soon as multiple offers become likely. Click here for a detailed discussion of multiple offers.

Risk management disclosures are really just the documents an agent uses to show the client was fully informed about the situation and the agent’s actions. A client faced with foreclosure is looking for someone to save them. If that proves impossible, they may turn on the savior. Residential buyers in the pre-foreclosure market are looking for a deal. Getting that deal may prove a lot more difficult than expected. The potential for dashed expectations is high on both sides. The wise agent will control expectations by disclosing early and disclosing often.
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Marketing property in the face of foreclosure is different from marketing property generally in several important ways. First, foreclosures are public. Judicial and non-judicial foreclosures are public events in the sense that the details, including the owner’s name, the property address, the amount due on the loan and so on, are public information. There are companies and individuals who make their living churning the distressed property market. Dealing with these people, usually representing themselves as “investors,” is something to consider before taking on the marketing of property in the face of foreclosure.

The distressed property crowd creates issues for real estate agents in a number of related ways. People trying to make money on distressed property can be pushy low-ballers who upset sellers, complicate your marketing and generally take up time. Not all of them are ethical. A few are crooks. On the listing side, having a good relationship with your seller will help you keep yourself and your seller out of the worst that the distressed property market has to offer.

Forewarned is very much forearmed when it comes to marketing distressed property. The first step is to gather information. The Internet can be a source of information on foreclosure problems. For instance, a good deal of information on mortgage foreclosure rescue scams can be found here. The Oregon Department of Consumer and Business Services publishes a booklet entitled: “Foreclosure You Can Avoid It.” Further, the Oregon Department of Justice has helpful information here. Finally, agents should make themselves aware of what is going on in the local foreclosure market. The foreclosure market fluctuates and varies from area to area. Local knowledge is a huge advantage when marketing property in the face of foreclosure.

Knowledge is the key to marketing property in the face of foreclosure because it can be used to control expectations. Expectations (whether those of the seller or the buyer) are controlled by timely disclosure. There are two types of disclosures involved. The first is the disclosures the agent makes to their own client for risk management purposes. The second is the disclosures made to the other side as a matter of legal duty. These two different disclosures are not well understood.
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A trust deed is a real property security instrument created by statute. The relevant statute is the Oregon Trust Deed Act, ORS 86.705-86.795. A trust deed is similar to a mortgage but usually gives the security holder a “right of sale.” This “right of sale” allows the security holder to foreclose on the property without having to file a lawsuit in court. This process is called “foreclosure by advertisement and sale” and is found in ORS 86.735.

Trust deeds are called trust deeds because the deed is held by a third-party trustee. When the grantor (the property owner) pays the debt owed to the beneficiary (the lender), the trustee re-conveys the property back to the grantor. If, however, the grantor defaults, the beneficiary can elect to have the trustee foreclose on the trust deed. When that happens, the foreclosure is accomplished by the non-judicial procedures set out in the Oregon Trust Deed Act.

As with judicial foreclosure of mortgages, foreclosure of a trust deed by advertisement and sale requires a default. Unlike mortgages where the security holder can accelerate the entire debt, the property owner on a trust deed can cure the default by paying the amount delinquent under the trust deed. This right to cure by paying the delinquency instead of the entire debt is a powerful right. The right to cure is, however, cut off on the fifth day before the date set for the sale.

Non-judicial foreclosure is commenced by the recording and service of a Notice of Default. The contents of the Notice are set out in ORS 86.745. Among other things, the Notice will state the names of the parties involved, the sum owing on the obligation and the date, time and place of the sale. The notice starts the foreclosure clock running.

A non-judicial sale cannot be set for less than 120 days after the Notice is given. To this time must be added the time necessary to process the paper work and complete service — generally two or three weeks. The Notice must also be published in a newspaper of general circulation in the county for four consecutive weeks. The last publication must be at least twenty days prior to the sale. Taken together, these notice and publication procedures make it difficult to complete a non-judicial foreclosure in less than six months. Five months from the date of notice is pretty much the minimum time required for a non-judicial foreclosure.

According to ORS 86.770, “[a] guarantor of an obligation secured by a residential trust deed may not recover a deficiency from the grantor or a successor in interest of the grantor” “Residential trust deed” is defined in ORS 86.705(3) as “a trust deed on property upon which are situated four or fewer residential units, one of which the grantor, the grantor’s spouse or the grantor’s minor or dependent child occupies as a principal residence at the time a trust deed foreclosure is commenced” There is no right of redemption following a non-judicial sale.

Whether a trust deed is a “residential trust deed” is determined at the time of foreclosure and, therefore, may change depending on who is occupying the property. Thus, what started out as a residential trust deed may become a non-residential trust deed. This can expose the grantor to a deficiency judgment. It is for this reason that real estate licensees should never make statements about whether a particular owner will or won’t be exposed to a deficiency judgment in a particular non-judicial foreclosure.
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Judicial foreclosure requires a lawsuit in circuit court brought under the provisions of ORS 88.010 et. seq. The mortgagee or lien holder sues to have the mortgage or lien foreclosed. If the suit is successful, the court will issue a decree and order the property sold by the local sheriff at a public auction.

In order to sue for judicial foreclosure, the owner of the property must be in “default.” “Default” means they have failed to meet the terms of a mortgage or otherwise failed to pay a debt when due which is secured by the property. Like any lawsuit, a foreclosure suit requires service of the filed complaint. Service will serve as notice to the property owner that the legal foreclosure process has begun.

Once the suit is filed, the owner can avoid the foreclosure only by satisfying the debt. This right to satisfy the debt ends when the property is sold. How long it will take for the court to order foreclosure is hard to predict because it depends on whether the default is contested as well as how full the court’s docket is with other cases. Typically, a judicial foreclosure will take six months or longer.

Foreclosure sales are conducted according to the public sale provisions of ORS 18.924. The provisions require notice and publication, including posting notice on the property (usually taped to the door) and serial publication in newspapers. Once sold, the former owner has a six-month statutory right of redemption. That means they can get the property back for up to half a year after the sale by paying the purchaser the purchase price, taxes, interest and other costs.

Oregon is a “non-recourse” state when it comes to most residential property. “Non-recourse” means the mortgage holder cannot collect a default judgment if the sale does not produce enough proceeds to pay off the entire secured debt. The mortgagee takes the loss if the property is not worth the loan value As a general rule in the judicial foreclosure of residential property in Oregon, the mortgagee will have no recourse because under ORS 88.070 most residential mortgages are what are called “purchase money mortgages.”

A purchase money mortgage is one in which money is borrowed to purchase the property to which the mortgage is attached. There is, however, no general non-recourse rule for all liens and mortgages on real property. Mortgages on residential property taken for reasons other than for purchase may be subject to default judgments. Real estate licensees should, therefore, never advise clients about default judgments and should instead always refer clients to a lawyer, accountant or other financial professional.
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ORS Chapter 86 Mortgages; Trust Deeds

ORS Chapter 87 Statutory Liens

ORS Chapter 88 Foreclosure of Mortgages and Other Liens

Foreclosure is the means by which a creditor gains the right to sell real property that secures a due and unpaid debt. The debt can be in the form of a mortgage, a note and trust deed or a lien on the property. Whatever the instrument, foreclosure under Oregon law is the only way the creditor can force the sale of real property to pay the debt.

There are two kinds of foreclosures in Oregon. One is called judicial foreclosure. The other is called non-judicial foreclosure. Judicial foreclosure is typically used to foreclose mortgages and other liens on real property. Non-judicial foreclosure is typically used to foreclose interests under a trust deed by a process known as “advertisement and sale.”

All foreclosures are closely regulated by statute under Title 9 of Oregon Revised Statutes. The judicial foreclosure of mortgages is governed by the provisions of ORS Chapter 88. Liens are covered in ORS Chapter 87. The non-judicial foreclosure of trust deeds is governed by the provisions of ORS Chapter 86.

Generally, foreclosure laws and procedures are beyond the scope of a real estate licensee’s expertise. Extreme care should, therefore, be taken when marketing property that is in foreclosure or in danger of foreclosure. Click here for a discussion of Marketing Property in the Face of Foreclosure. Foreclosure is always a factor in a short sale. Click here for a detailed discussion of Short Sales.
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On the selling side, REOs can be big trouble. The commissions can be discounted, the listing agent detached, the seller distant and disengaged and the deal a legal nightmare on unfamiliar forms. If ever there was a “no such thing as a free lunch” transaction, it’s a REO transaction from the selling side. Selling agents and their clients need to understand the REO market and adjust accordingly. Many buyer agents will not show REO property without having a buyer service agreement with the buyer that spells out duties and compensation.

Adjusting to the REO market means understanding that a lender is not an unsophisticated homeowner selling their property with the help of a real estate licensee. Until the rise of the distressed property market, most agents had been involved only in homeowner transactions done on standard agent supplied forms using traditional practices and procedures. The residential homeowner sale market was so much of the total real estate market for so long that the forms, practices and procedures used in that market were often misunderstood as somehow required by law. That is simply not the case.

Buyers and sellers are not regulated by the state as buyers and sellers in any serious way. Sure, there are laws about contracts, deeds, required disclosures and the like, but not about how buyers and sellers must conduct their negotiations. Real estate agents are licensed and subject to real estate licensing laws, but license laws do not apply to buyers or sellers. Much, if not most, of what real estate agents do, and how they go about doing it, is not law but custom custom developed in the homeowner/homebuyer market. These customs have little or no application in the REO market. This causes no end of angst on the selling side of REO sales.

Because REO sales involve an institutional seller who is liquidating assets for loss mitigation purposes, REO sales are done on seller-generated forms with provisions never seen in homeowner/homebuyer sales. The companies involved in selling bank assets have well paid lawyers who have no trouble at all understanding their client’s needs. Those needs are to retain full control of the transaction until closing, minimum transaction costs and no liability after closing. These seller needs are typically met by the seller demanding that all buyers use the seller’s forms typically one or more addendums that are added to the contract form used by the buyer.

The seller’s addendums in a REO transaction are made the controlling instruments in the sale by expressly superseding any conflicting provision of the sale agreement to which they are attached. The addendums are often as long as the sale agreement form used by the buyer’s agent. The terms added are complicated and contrary to most of the terms found in standard homeowner/homebuyer forms. The REO addendum, therefore, ends up controlling all the important terms and conditions of the sale. Although real estate licensees cannot practice law by giving clients advice about the legal meaning of REO clauses, they should be aware of the business consequences of common REO clauses.

Most REOs use “property condition” addendums or clauses that are true legal works of art when compared to the tepid “as is” clauses used in homeowner/homebuyer forms. Rather than simply disclaim warranties and representations, REO clauses often make buyer risk and responsibility for the condition of the property part of the consideration for the contract itself. Sometimes these property condition clauses are set out as a separate addendum. Sometimes they are just a clause in the general REO addendum. However they are presented, REO property condition clauses are specifically designed to make it difficult or impossible for the buyer to sue the seller after closing for after-discovered defects. In short, all risk of loss from the condition of the property is shifted to the buyer.

REO contract and addendum clauses can hold other risk shifting surprises for the buyer. For instance, the title conveyed may be a bargain and sale or special warranty deed that does contain the same title warranties as in a homeowner/homebuyer sale. If the buyer wants financing, the seller may demand prequalification by a specific lender at the buyer’s expense. That is perfectly legal as long as they do not make where the loan itself comes from a term or condition of the sale. Finally, many REO contracts contain “per diem” clauses that can cost the buyer as much as a hundred dollars a day for any delay in closing, regardless of the reason for the delay.

REO addendums are usually presented on a take it or leave it basis by adding provisions that expressly forbid buyer-initiated changes. Listing agents are often instructed not to submit offers that do not conform to the seller’s offer criteria. This practice is very distressing to buyer agents, but the seller is entitled to define what they will and will not consider as an offer to purchase their property. An unaccepted offer in the hands of the seller is the seller’s document to do with as they please. They can instruct their agent to line things out, add provisions, or do what they will and hand it back to the buyer. It has nothing to do with making changes above some line. It is just a way, albeit a poor one, to communicate the seller’s offer criteria to the buyer. In REO’s, the seller will end up making a contingent offer to sell instead of the buyer making an offer to purchase.

The exchange of offers and counter-offers process used in homeowner/homebuyer real estate sales is not required by any rule or law. It is just a convenient process used to form contracts. It creates mutually binding contracts that can protect the rights and expectations of both parties. But that’s not necessarily what an institutional seller wants. The institutional seller wants full control, minimum transaction costs, and no ongoing liability. As a result, they don’t use the standard real estate offer and acceptance process.

In REO transactions, the seller may not be very interested in whether a particular buyer closes on a particular property because they have lots of properties and lots of buyers. They are seeking aggregate benefit, not just a single transaction benefit. To the buyer, and their agent, the REO transaction is a single transaction, but that is not the way the seller sees it. A REO seller’s attitude often is: “Ok, we can work with you on this and, if at the end of the day we still think it’s good for us, we’ll go ahead and close it, otherwise all bets are off.” That is not really acceptance in the legal sense of the word. It is a contingent offer.

A contingent offer is one that says: I will enter into a contract with you on these terms in the future if I still want to. Look for clauses like: “final acceptance of the contract of sale is subject to seller’s approval” or “this contract is contingent upon final approval by seller or seller’s Agent” or “the seller reserves the right to terminate the contract for any reason in its sole discretion” or “not binding until accepted by seller” or variations and combinations of reservation and approvals. In Oregon, a contingent offer is treated much like a letter of intent and is not usually binding on either party. It is not “illegal” to do business in this wa; it’s just that it is not the way agents and buyers usually think about real estate contracts.

At this point, buyer agents have to be wondering what, if anything, they can do for their clients in a REO transaction done on REO addendums using REO procedures. The answer is, negotiate in good faith and keep the buyer informed. The fact that REOs often have their own forms and procedures and are usually unwilling to even talk about changing those forms or procedures does not mean there is nothing the buyer’s agent can do.

It is not the agent’s duty to interpret the legal consequences of using REO forms. It is not their duty to demand changes in REO procedures or rail against the inequity in bargaining positions. Rather, it is agent’s duty to help the buyer client understand the business and real estate consequences of what is going on. That means finding out what is going on and reporting it to the client. The agent needs to have some way to document both the finding out and the reporting.

Finding out what is going on is a matter of asking questions. It is true that listing agents in REO deals sometimes do not do a good job of making the seller’s requirements known. That does not, however, excuse a buyer agent from treating a REO listing as if it were a homeowner listing. When a buyer wants to look at a REO listing, it is time for the buyer’s agent to shift gears. That shift should begin with telling the buyer that the property is a REO and what they can expect as a result. This is best accomplished at this early stage with a standard Client Information Letter.

A client information letter is just a way to provide important information to a client (and to prove you did so). Client information letters are not transaction documents. They are not disclosures or disclaimers. They are records of communication between principal and agent. They go in the client’s file. What is recorded is evidence of the agent’s diligence in promoting and protecting the interests of their client while staying within the scope of their expertise. Such letters can be standardized for convenience and efficiency. For example, here is a sample of an information letter to a buyer client who is considering a REO property:

“Information Regarding Real Estate Owned (REO) Property”

You have expressed interest in looking at, and perhaps purchasing, property owned by a bank. Such property, called “real estate owned” or “REO” property, can represent a price bargain. There are, however, some things you should be aware of before getting involved in a REO transaction.

Although banks are often willing to take less money for a property than might a homeowner with similar property, they will typically do so only on terms that are beneficial to the bank. REO property, therefore, is often sold using addendums to standard real estate contracts that substantially change the terms to favor the seller. Most often, these REO contracts and addendums are presented on a “take it or leave it basis” much like a car dealer presents a dealer’s contract that cannot be changed by a car purchaser.

Among the terms found in REO contracts or addendums are those that substantially limit the buyer’s ability to sue the seller if a problem with the property is discovered after the purchase is completed. Such terms make the inspection and investigation of REO properties by the buyer absolutely critical. Inspections and investigations can increase the buyer’s transaction costs. Limiting the buyer’s legal remedies can create substantial risk for the buyer. These increased costs and risks must be weighed against any potential reduction in price of REO property.

REO contracts and addendums often contain provisions that postpone the seller’s acceptance or otherwise reserve to the seller the right to cancel the contract if they obtain a better offer or decide for other reasons not to proceed. Such terms create uncertainty for the buyer because there may be no binding contract until right before the closing. The buyer, therefore, may be expending money to determine the condition of the property, the state of its title, compliance with government regulations and so on without a binding contract. These matters must be carefully considered before becoming involved in a REO transaction.

A real estate licensee cannot give legal advice or offer opinions on the legal consequences of specific contract terms. For that reason, I must strongly recommend that you seek the counsel of a qualified real estate attorney before entering into a REO transaction using forms provided by the seller. Although I will work closely with the listing agent to obtain information about the seller’s forms and procedures, and pass that information on to you, I cannot be responsible for the legal consequences of entering into a transaction on forms developed by the seller and offered on a take-it-or-leave-it basis. You must judge for yourself whether the potential savings are worth the risk and uncertainty typically found in REO transactions.

Click here to download a copy of the sample client information letter.

The point when dealing with REOs on the selling side is that a buyer should understand the situation. That begins with defining the situation. Defining the situation is a matter of communication with the listing office. Discussing documents and procedures with the listing agent is the first step. The second step is a follow-up email to the listing agent clarifying what was discussed. The third step is communicating the resulting information to the buyer client.

This pattern of communicating with the listing office, following up the communication with a confirming email, and then communicating the result to the buyer is good service and good risk management. Take, for instance, the no acceptance problem. The fact that the seller is reserving acceptance is as big a problem for the listing side as for the selling side. That being the case, they will have some mechanism for communicating some kind of preliminary OK. When that preliminary OK comes in, whether by phone, email, fax or whatever, follow it up with a confirming email. For example “this is to follow up on our telephone conversation this morning in which you confirmed that the seller is moving forward on our offer and ��” Copy the buyer and follow up any conversations with the buyer with emails as well. What you are looking for is a chronological email record that shows a diligent agent and a well-informed buyer.

It is hard for some agents to settle for being a diligent agent and keeping the client well informed because they believe they have to protect the client’s interests. Although true, the agent does have to protect their client’s interests, that doesn’t mean the agent has to decide what is best for the client. It doesn’t mean the agent has to be a lawyer. A real estate agent protects the interests of their client by finding and communicating information about the property and the transaction and using their real estate training and experience to advise the client on the potential business or real estate consequences of the transaction. Look again at the sample client information letter with this in mind.
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On the listing side, REOs are mostly about having a tightfisted, unresponsive, disinterested seller with a strong desire to minimize transaction costs and avoid all potential liability for the sale. For a “day in the life” view of what REO listing agents do, see Sheryl Vogel’s REALTOR® ONLINE ARTICLE. Although some lenders will spread REO listings among local real estate companies, more will work through only one local company or a large national “servicing” company whose business is handling REO sales for lenders. Listing REOs, if possible at all, is about making a deal with a demanding seller who has its own way of doing things. REO listings are, therefore, not for everyone.

A real estate professional on the listing side of any real estate sale has three general responsibilities. They will market the property, negotiate the deal and assist the seller in closing the resulting transaction. Those general responsibilities don’t change with a REO listing, but the way each is accomplished almost certainly will. Most banks and REO servicing companies have their own listing forms. These forms bear no resemblance to the MLS-generated homeowner listing forms most real estate agents are familiar with. REO listing agreements typically impose significant additional duties on the listing agent.

Marketing owner occupied residential real estate is about working with the homeowner to get the listing, throwing the listing in the MLS, running some ads and waiting for the buyers. REOs don’t work that way because there is no owner occupant to deal with. There is often no one at the property to discuss the condition of the property, make disclosures regarding the condition of the property, arrange for pre-sale repairs or staging or do any of the myriad of other things sellers usually do when they want to sell their house. Banks typically look to the listing agent to assume the duties of the owner occupant.

Most REOs come from foreclosures that dispossessed the owner-occupant. That means the previous occupant was living there for a period of time, sometimes a significant period of time, under severe mental stress and with no money. The condition of the property at the time of listing can, therefore, vary anywhere from an empty, neat and broom-clean house to a squatter occupied dump that has been stripped of all wiring and plumbing. Listing agents often become the point person for the bank in dealing with these issues. Indeed, some banks expect the listing agent to not only evict squatters, but fund with their own money getting the property in condition to sell. A wise listing agent will work through exactly how occupancy and property condition issues will be resolved before taking on the listing. Most lender service companies that handle listing REO property have provisions in the master listing agreement about such things.

The up side of REO listings is that REOs actually attract buyers (and their agents) because “REO” signals discounted property and that can mean the listing agent will see a flurry of lowball and oddball offers as soon as the listing goes active. How to deal with lowball and oddball offers, and the distrust and distaste of some buyers and their agents, are things the listing agent should work out with the bank at the time the property is listed. Some banks will handle the “lowball/oddball” issue by instructing the listing agent not to take offers below a certain price or on certain terms. Some will require buyers who make offers with finance contingencies to pre-qualify for a loan through the selling bank even if they are seeking financing elsewhere. Both of these strategies for dealing with lowball/oddball offers can put listing agents in a tight spot.

Oregon statute requires the listing agent “To present all written offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase.” ORS 696.805(2)(b). Oregon administrative rules go a step further and require that: “A real estate licensee must promptly deliver to the offeror or offeree every written offer or counter-offer the licensee receives.” OAR 863-015-0135(2). As if that were not enough, the REALTOR® Code of Ethics wades in with: “REALTORS® shall submit offers and counter offers objectively and as quickly as possible.” Standards of Practice 1-6.

The statute, rule and Code provisions regarding the submission of offers and the like are often taken to mean the listing agent must submit every offer they receive to the seller whether the seller wants to see it or not. That cannot, however, be the case. Real estate statutes and rules and, of course, the Code of Ethics, do not apply to sellers. An agent cannot make the seller consider offers the seller has told the agent they do not want to consider. You cannot have a rule that says the agent must obey the seller and one that says the agent must make the seller consider offers they have specifically told the agent they will not consider. Fortunately, real estate rules create no such a conflict.

There is no reason to interpret the “present written offers in a timely manner” requirement as requiring the agent disregard or disobey the seller’s instructions. The seller has every right to say what they will or won’t consider as an offer. A piece of paper with the buyer’s signature and terms is not an offer to the seller if the seller has specifically defined what they will consider an offer. The seller can define the manner in which offers, in the form they demand, will be presented to them. They can define what they consider “prompt” by defining the circumstances. (“Prompt” means as soon as is practical in the circumstances and the seller can control the circumstances). In short, the seller can tell their agent they will not consider any offer that does not meet certain criteria established by the seller to be an offer. Until and unless the offer becomes an offer the seller will consider, there is nothing to submit or present or to be prompt about.

What is needed as far as the listing agent is concerned are clearly written instructions from the seller establishing what will be considered an offer and how the agent is to handle submissions from buyers that do not meet the seller’s definition of offer. The agent needs clearly written instructions because the agent does not have the authority to unilaterally decide what is and isn’t an offer. Real presentation rules are designed to prohibit agents from deciding themselves what the seller should see, but that doesn’t mean the seller cannot decide for themselves what they want to see. If the seller doesn’t want to see all offers, get the seller’s limitations on offers in writing and disclose those limitations up front to other agents and buyers by making it clear they are the written instructions of the seller.

Written instructions from a seller are wonderful things, REO or not. Unfortunately, when the seller is a bank, written instructions can be hard to come by. Banks aren’t people. They employ people to act on their behalf. That means the interests of the bank and the interests of the people employed can be two very different things. That the bank doesn’t want to see certain offers may or may not be the bank’s idea. It could be the idea of a burned out ex-mortgage broker riding out the real estate bubble they helped create by hiding out in the bank’s loss mitigation department doing REOs until things blow over. Such people know they can say pretty much anything they want to as long as there is no written record of what was said. The trick for listings agents is to make sure there is a written record of what is said.

Email is the perfect tool for the control of bank employees. Confirm everything that could come back to bite you, or the bank, your client by email. If a bank employee tells you not to forward offers unless they are above a certain price or that the buyer must be pre-qualified by the bank before an offer will be considered, thank them for the instructions and immediately repeat them back to them in a nice email. For instance:

“This is to confirm your instructions regarding offers on our listing #____________. I understand that you will not consider any offer below $_______________________ and that I am to inform buyers of this requirement and that their offer will not be forwarded for consideration if it is below $____________________. I will place this limitation in the MLS remarks so that agents understand your requirements. I also understand that offers contingent on buyer financing will not be considered unless the buyer has applied for and received a pre-qualification letter from the bank. Again, I will inform all buyers that this requirement must be met before their offer can be submitted for your consideration. I will place the requirement in the MLS remarks. Until I hear otherwise, I will proceed based on your instructions not to forward offers that do not meet these requirements.”

If the bank employee who signed the listing is not the same as the one giving you instructions on the listing, copy the email to the person who signed the listing. If they tell you stop copying them, send them an email that says “per your instructions, I will no longer copy you on emails regarding our listing # _____________________.” If this sounds paranoid, it is. Banks are institutions that handle other people’s money. Many of them are in serious trouble. They employ lawyers. The people they owe money to employ lawyers. When something goes wrong, you don’t want to be the one left holding the bag. That doesn’t mean being obnoxious or obstructive, but it does mean practicing situational awareness and paying attention to details.

Situational awareness means keeping things in context and thinking through potential consequences. Here is a true story that illustrates the point: A broker with a REO listing that wasn’t moving at $235,000 received an email from the bank’s loss mitigation department telling the broker to reduce the price to $99,000. The broker phoned their contact at the bank questioning the instruction, but was told: “do what you’re told; we need to get some interest going on this property.” Concerned about the potential for an unlawful trade practices claim if the bank had no intention of selling at $99,000, the broker emailed her bank contact person explaining her concern and suggesting the bank ask their lawyer about it. The broker immediately received an email from the loss mitigation manager saying the reduction must have been a typo and the price was really $199,000.

There is little, if anything, a broker can do to change the business practices of their lender client. It is often impossible to know whether what you are being told is the position of the client or just the position of the client’s employee. About all a listing side real estate licensee can do is keep from getting stuck holding the bag if something goes really wrong. The only way to do that is to document the client’s instructions and make certain there are written records that show why things were done as they were. It is always a good idea to then make sure the buyers, agents, third-party service providers and others involved understand what the seller wants as well.

Arranging for repairs, utilities, staging and the like is a good example of documenting instruction and making sure others understand why things are being done as they are. REO property is absentee-owner property. That means that the seller doesn’t know much about the property, isn’t around to do things for themselves and generally isn’t very responsive to marketing needs. This tends to put pressure on the listing agent to make arrangements, sign documents and so on. There is nothing wrong with that as long as agents remember they are not the seller and act accordingly. For instance, if the agent is ordering repairs, or utilities or arranging for staging, the order or contract for any services should be, whenever possible, in the lender’s name, not the agent’s, even if the agent will sign the order.

If Big Bank is the owner, and Sammy Sale the agent, the service order or contract should be in the name of Big Bank and is signed: Sammy Sale for Big Bank. The agent should be sure Big Bank is aware of the service order or contract for services. Again, this can be done by discussing the matter with the client and confirming the discussion with an email. For instance:

“This is to confirm our conversation yesterday regarding repairs on the property we have listed. Pursuant to your instructions, I will act as your agent to arrange for the repairs we discussed to be done on your behalf.”

Make sure the contractor makes the contract out to the client and that you sign for the client. That way, if something goes wrong, you are clearly an agent acting under the instructions of the client.

Some REO listings contain provisions requiring utilities, repairs, and so on to be in the listing agent’s name. This creates risk for the agent. Whether the listing is worth the risk depends on a number of factors. First and foremost are the terms for reimbursement. For instance, many REO service companies demand that all expenses be accounted for at closing or they will not be paid. That can mean the agent bearing the costs of utilities, repairs and so on if there is no sale. Read the master listing agreement and resolve these issues up front with the client. Regardless of who is paying, the key on the listing side is the same: The agent is acting under the instructions of the client as an agent and must make sure the records reflect that arrangement.
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REO is the acronym for “real estate owned.” It is the acronym banks use for real estate the bank forecloses upon, takes in lieu of foreclosure or otherwise owns. Such property is carried on the bank’s books as an asset. The value of the bank’s assets is critical to the operation of the bank because the bank’s balance sheet, and thus its solvency, is linked to the value of its assets. In a market downturn, like the downturn in the real estate market after 2007, real estate assets become less valuable and this can raise very serious solvency issues for banks.

The link between asset value and bank solvency makes the sale of real estate owned critical to bank operations. The link also makes it difficult to predict how a bank will go about selling the real estate it ends up owning. Typically, the sale of real estate owned is handled by the bank’s “loss mitigation” department. Loss mitigation means making losses less severe or painful to the bank. How the loss mitigation department tries to mitigate the loss associated with real estate owned depends on the direction of the market, the rate of market change, market liquidity, the bank’s ratio of liabilities to capital and assets, the number of properties owned and many other factors.

As complicated as the loss mitigation factors may be, the bottom line is that the bank wants to keep losses to a minimum. That means that, contrary to popular belief, REOs are not normally dirt cheap. Banks do discount their property to reduce time on the market and to account for the fact that bank property is typically not occupied, or staged or otherwise groomed to obtain top price. Historically, this discounting has put REO properties on the market at about 95% of true market value.

Beginning in the Spring of 2009, government intervention in financial markets and the glut of REOs resulting from historically high foreclosure rates began forcing banks to consider larger discounts to clear their books of real estate owned. In some markets this has led to REOs being sold at 75% or less of market value. As a result, pre-foreclosure, REO and other foreclosure-driven sales can make up as much as 50% of total sales in some markets. Although the market is “distressed,” sales can be “hot” with multiple offers, escalator clauses and all the other pushing and shoving associated with a hot market. Click here for detailed discussion on multiple offers in a distressed property market. It has, therefore, become increasingly important that real estate professionals understand the operation of the REO market.

Unfortunately, the REO market involves a very odd real estate commodity. Most of the real estate owned market is residential. What is being sold is homes, but not homes in the typical owner-occupied family home sense. To the bank, the home is just an asset with a market value no different than a piece of repossessed farm machinery or the inventory of a failed business or a corporate bond. To the REO buyer, the home may be a home or a rental investment or just real estate with a short-term flip value. Thus, the REO market consists of buyers with different goals competing in a market where sellers are detached business people trying to minimize a loss rather than maximize profit.

Most agents spend their careers helping homeowners and homebuyers get together. Real estate practices and forms are designed for this homeowner/homebuyer market. The vast majority of individual agents’ experience is in the homeowner/homebuyer market. Although the object of the transaction is the same residential property REO transactions have very little in common with homeowner/homebuyer transactions. Whether on the listing side or the selling side, expectations, practices and forms will all change in a REO transaction. That means a steep learning curve for agents who find themselves in the REO market.
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