Quick Answer Series: Oh No! Another REO!

I’m often asked what I think about REO business.  Here’s what I think: It beats no business at all… barely.  Now that I have your attention, let me take a minute to explain why.

First, for the uninitiated, let me explain the term REO.  REO stands for “Real Estate Owned”.  Talk about dumb names!  I am not aware of any real estate that is NOT owned.  Are you?  I digress.  Bad name aside, REO has come to mean real estate that is owned by the lender, after a foreclosure.  Now why couldn’t they just say “bank owned” and save us all the confusion!

OK, now that we understand the term, let’s talk about REO business as an “opportunity”.  There are really two different ways to make money on REO properties: buyer side, and listing side.  (I know, you’re thinking, DUH!)  Let’s look at each one.

I liken buyer side REO business to eating ribs.  Sounds good.  But let’s think about it.  Eating ribs is always a let down.  Sure, they’re good, but you do a lot of work for a mouthful of food.  And it’s messy too.  Reminds me of REO business on the buyer side.  If you’ve ever had the misfortune of dealing with a large asset manager on behalf of a client, you totally understand.

REO properties are managed by what is known as an asset manager.  He or she is called that because the real estate is an asset on the books of the lender.  If you were dealing with a small bank that did their own lending, managed their own loans, and then got a house back after foreclosure, it would be much different.

But today, lenders are huge.  They typically purchase traunches (bundles of similar mortgages) in the secondary market (think Wall Street).  It is common to see hundreds of millions of dollars in mortgage paper in a single traunch.  That’s important because when a mortgage goes into default and the property goes through the foreclosure process, the company managing that asset is also managing hundreds or even thousands of others at the same time.

The asset manager is not commission based, and so he has no direct interest in the sale, and is the very picture of an unmotivated seller.  And typically, he is some mid-level manager with little decision making power.  Any proposal you make will have to go to a committee.  What that means is that if you are negotiating with an asset manager on behalf of your client, you will be working many, many hours to do a single deal, if you ever complete it.

One of my favorite REO transactions (of course we hadn’t invented the term REO at the time) was a foreclosure property of about 6,000 square feet.  It was a magnificent home, but it was also much nicer than the homes around it.  I had a client that wanted it badly.  The mortgages balances on the property had the asset manager wanting about $650,000 for the home.

Over what seemed like an eternity, and was actually about a three month period, I eventually made my client’s case that the home, while very nice, was simply over built for the area.  We ultimately got the home for only $189,000.  The asset manager fought me every step of the way, and we had to go to his committee again and again.  At the end of the day, I did both sides of the work and got one side of the money.  I worked three months and made $4,536!  Woohoo!  Fortunately, it was not my only business.

And I’ve heard many other stories just as bad.  My point is that working buyer side REO business is way too much work for the money.  You’d be better off washing cars or flipping burgers.  And it’s thankless, because the client has no idea how much work, comparatively, goes into an REO transaction.  They just assume it is a normal transaction and you are doing what agents do.

Now let’s talk about seller side REO business.  I have a friend that owns a very large real estate firm in Atlanta.  His company has managed to win the HUD contract for northern Georgia.  In other words, he is the listing agent for all FHA foreclosure properties.  It makes him lots of money.  If you can do REO on that scale it is great business.  But let’s get real.

He has ten offices, and is a very large real estate player.  Size does matter.  Today, most asset managers are not selling one or two properties.  They typically have hundreds a month.  They require someone to be able to service the entire book of business for an area.  That means having a very large, established, brokerage.  The business is also put out for competitive bidding, so that if you are even able to qualify to bid on the business, you will likely be doing it for very little in brokerage fees.

I know of another agent who has managed to secure the REO business for a manufactured housing lender.  He has been doing that business, exclusively, for many years and making decent money.  But again, that’s all he does.  It’s his niche and he has spent years building it.

So here is my bottom line: There is opportunity doing REO business.  But it’s not the panacea that today’s gurus and coaches would have you believe it is.  And at the end of the day, it amounts to wholesale business.  There’s nothing wrong with wholesale, but why settle for wholesale when there is plenty of retail business?

I think that REO business is something you want to absolutely avoid whenever possible on the buyer side, and at least seriously consider avoiding on the listing side.  And that’s my quick answer.

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