Foreclosure Disclosure

What Buyer's Reps Should Know

By Edward Bugos, ABR®, SFR, Coldwell Banker Hunter Realty, Willoughby Hills, Ohio

Arizona REALTOR® Magazine - July 2010

This article first appeared in Today's Buyer's Rep Volume XIX, Number 5 (May 2010), a publication of the Real Estate Buyer's Agent Council.

When I last wrote about foreclosures in Today’s Buyer’s Rep (March 2007), no one realized just how big an impact they would have on the residential housing market. As we know all too well, a “perfect storm” of circumstances created a situation that grew much worse than many experts feared. Just look at the year-end data from 2009.

RealtyTrac put the number of reported property foreclosure filings at almost 2.9 million. That represents a 21 percent increase from 2008, and a 120 percent spike since 2007. Put another way, last year nearly 2.25 percent of all housing units in the country were subject to at least one foreclosure filing. That’s one in every 45. Overall, sales of “distressed” properties accounted for about forty percent of all transactions.

That’s the bad news. The good news is that all markets are local. And many are in much better shape than this. Things are looking up on the national level, too. For many buyer’s reps, the presence of distressed properties is not entirely bad news, as this has been an important source of business during otherwise-slow real estate markets. 

According to the Wall Street Journal, properties available for foreclosure sale fell more than 25 percent between November and December 2009, down to 617,000. Homes in desirable neighborhoods are getting “snapped up.” Prices reported by investors are increasing in bidding wars from 75 to 85 percent of appraised value. In February, the Mortgage Bankers Association reported a drop—albeit slight—in 30-day delinquencies, historically a leading indicator of more serious delinquencies and foreclosures.

Source: NAR's REALTORS® Confidence Index

Yet because I’ve worked in this niche so long, I tend to be a bit more guarded. What I see in my local market may also color my view. To me, what all this data adds up to is a pool of more than 2 million properties that may not be purchased the “traditional” way.

In fact, I view the traditional model—where buyers purchase homes from homeowners represented by listing agents—as the transactions of yesterday. Instead, I see a new model dominated by Real Estate Owned (REOs) and short sales. In my area, these properties are glutting the inventory, lowering values and driving the market.

As a result, I think there are certain things every buyer’s rep needs to know about today’s market—even if your local conditions haven’t sparked the dramatic changes I see in the industry. With added knowledge and insight, buyer’s reps can confidently guide their clients through the purchase of a distressed property. While my suggestions refer primarily to REO transactions, these tips can also be beneficial in short sale situations, where the lender must approve the sale.

1. Logic trumps emotions.

As far as lenders are concerned, the sale of an REO property is all about making a rational business decision based on dollars and cents. These transactions never involve emotions, as can often be the case in a traditional transaction.

Appealing to a seller’s emotions may be a good tactic to get your client’s offer to the top of the pile in a hot market. But in an REO transaction, lenders hire asset managers to do one thing and one thing only: to minimize lenders’ losses by getting as much money for each property as possible. They simply don’t care if a buyer loves a property and wants to raise their family there. In fact, saying this to an asset manager will likely hurt, rather than help, your client’s negotiating position.

2. Know the players and their rules.

We all know the rules and players in a traditional transaction. But in REOs, many of the rules are different, and so are some of the players. These new parties come to the table with vested interests of their own. And like asset managers, they mean business.

Get to know who these players are, what they do, and exactly how they do it. In this arena, close isn’t good enough. There are added levels of complexity that demand adherence to procedure. Certain steps—specific to the lender, the asset manager, the municipality and other parties—all have to be completed in the order dictated and in the manner required. For example:

• A listing that says “no half-price offers” means just that. Sellers won’t entertain any bid simply because the property is foreclosed. Your buyer-clients need to understand this too.
• When an asset manager tells you that the lender requires a certified check, make sure your buyer-client provides one. Your brokerage may accept personal checks as earnest money, but many lending institutions won’t.
• If told by the listing agent that the asset manager needs the written bid to be presented in a specific standard form, use that form, even if it differs from forms your brokerage typically uses.
• Keep in mind that in most instances, sellers want to use their own title company. That's because sellers may be dealing in a substantial number of transactions. Running everything through one title company, already familiar with the seller's contracts, helps keep costs down.
• Once it’s been agreed upon, honor the seller’s closing date. If your buyer-client can’t make the closing date, they can be placed in a per diem situation, meaning that the seller charges a daily penalty, as dictated in the contract, until the sale closes. You might be able to get an extension for your client, but if you can’t, the seller can hold your buyer’s funds for nonperformance.

In short, be professional—just as you are in a traditional transaction. The difference is that professionalism in REO transactions means that you need to follow different rules very closely. There are rewards for buyer’s reps who do.

Lenders, asset managers and listing agents understand that a foreclosure-heavy market favors buyers. So the commission structure often reflects this situation by being weighted towards buyer’s reps. But in return, the selling parties expect buyer’s reps to live up to the added demands placed on them. That’s why it’s so important to know what goes on in these transactions.

In a way, however, lenders, listing agents and asset managers make it easy, since they tell you exactly what is needed. You only need to provide it.

3. Your buyer-client must have proof of financing.

This is one of the most important rules. Obeying it ensures that your first impression with sellers will be a professional one. It will also save you wasted time with unprepared buyers.

Remember, even more so than with traditional transactions, REO purchases are financial deals. Sellers won’t give your buyer-clients the time of day without proof that they can sit at the closing table holding secured funds.

What do the sellers in REOs and short sales consider secured funds?

• Buyer-clients need to have current pre-approval for a mortgage for the sale price. Current means not more than thirty days old.
• For a cash deal, your buyer-client needs verification of funds from the financial institution holding those funds.
• To purchase a derelict property, your buyer-client needs approval for a 203K rehabilitation mortgage. Again, this must be current.
• Buyer-clients who are investors conducting business through a company also need to provide the company's articles of incorporation.

If you learn in your initial counseling session that your buyers don’t meet any of these requirements, courteously suggest that they come back when they do. But only after answering their questions about how to get qualified. After all, there’s no reason to cut loose a live lead, even if they aren’t yet ready to purchase.

4. Switching course is risky.

Keep in mind that the terms stated in a purchase contract are what drives a seller's decisions. For example, if your buyer says they plan to pay with cash, the seller is accepting their offer with certain assumptions concerning timing and costs.

I've seen numerous instances where a buyer decides to switch to financing after the offer has been accepted, without notifying the seller. Technically, this creates a breach of contract and the seller is entitled to walk. Cash means cash. If you find yourself in a similar situation, at a minimum, be up front about changes in your buyer's position. While the seller probably won't be happy about it, being forthright about the situation may reduce the likelihood that the transaction will blow up completely.

5. Are there exceptions to the rules?

Even though REOs and short sales are nontraditional transactions based on very specific and unique rules, it is also true that there are occasional exceptions to the rules. Never say never. For example, even though a property is offered "as is/where is," it is possible that the seller may make repairs, but this could come at a price.

6. Know your market—really know it.

When foreclosed properties are a small part of the overall inventory, keeping a finger on the pulse of these transactions isn’t pressing. But in markets like mine, it’s imperative.

Lenders usually give their asset managers a window for negotiation within several percentage points of a property’s determined asking price. But that asking price often changes in response to the Monthly Market Report (MMR).

Successful buyer’s reps know the reporting cycle and monitor the results. They understand that an offer that was turned down a few weeks ago might be accepted in the wake of a price reduction made in response to the latest MMR.

Today's Lessons = Future Benefits

Real estate business will of course continue to be conducted in the traditional way. But until local markets across the country stabilize, a thorough understanding of what I call the new normal is essential for everyone involved in today’s real estate industry. While the points outlined here are far from comprehensive, they provide a start towards that understanding—and towards helping your buyer-clients benefit from these new conditions.

With so much of the inventory comprised of distressed properties, it would be a disservice to your buyer-clients—perhaps even a breach of fiduciary responsibility—if you didn't investigate these properties for them.

That’s why this is such an important issue today. But knowledge and experience gained now, while foreclosures are more common, will still be valuable when they are again the rarity we all hope they will soon become.

Unfortunately, distressed sales are always going to happen. So developing a thorough understanding of the transaction will only serve to make you a better buyer’s rep. Now and in the future.

With over forty years in real estate, Edward Bugos’ experience has made him a nationally-recognized expert in short sales and foreclosures, niches he has worked in long before the market shift of recent years. Also a successful ABR®, Bugos is a member of the REBAC Hall of Fame and co-author of REBAC’s Short Sales and Foreclosure course. He closes up to 200 foreclosure and short-sale transactions annually.

 
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