Margins are thin enough in the real estate industry, but there is a niche of brokers and agents that work with asset managers and relocation management companies which specialize in REOs, where the work is hard, and the rewards iffy.

REO properties are time-intensive propositions involving investigative, appraisal, brokerage and rehab skills, yet brokers who are hired by asset management companies are often treated as if their time as well as the use of their money should be all but free – are REOs worth it?

One broker continues to do REO properties not because they make him much money, but because the opportunity costs can be looked at more than one way.

Iowa Realtor Lonnie Hohl says, “You have to do the bad ones to get to the good ones. Asset management companies don’t let you pick and choose.”

Hohl says he has noticed an increase in REO properties in his area lately. Right now he is working on about four REOs for different management companies, with prices that may range from $40,000 to $240,000. A rental property owner since he was a teenager, Hohl has been working REO properties for over 30 years. He started by rehabbing properties for his father. “One day I was working on a house and he said, ‘you ought to buy this property,” and we went down to the bank and I bought it,” recalls Hohl.

Since then, he’s built up a nice stable of real estate investors whom he calls regularly to tell them of good values he has run across. And that’s one of the reasons why working with REOs is a specialty.

”Consumers want properties that are move-in ready,” says Hohl, “and many REO properties aren’t in good condition. It may take an investor to purchase the property because they can do the rehab themselves or have the resources to get work done. They will also be able to see potential in a property that a typical homebuyer can’t see.”

For that reason, Hohl sells a large percentage of his REOs himself. One thing that can be said for investors is that they may be bargain hunters, but they are a sure thing to be repeat customers – if you can stay in front of them with properties.

“Investors don’t tend to be loyal,” says Hohl. “You have to give them a reason to do business with you.” Collecting both sides of the commission makes it far more worth Hohl’s while to take the bad with the good.

But making a profit with REOs isn’t easy, and sometimes it is impossible, in large part due to the policies of the asset management companies that pass out the business.

Brokers take the gamble that REO properties will turn into listings, but they pay dearly for such leads from asset management companies. The first hint that a broker may get that a property may be up for sale is when he or she is invited to render a Broker Price Opinion (BPO.) However, BPOs can take at least two to four hours, require extensive paperwork and typically must be overnighted to the company within a day or two of the order – all for $28-$75.

”We stopped doing BPOs for $45,” says Hohl. “For a while I would get calls and tell them on the phone that I can’t do one for less than $75, and then my check would arrive and it would still be $45. Now we tell them that the price has to be in writing.”

Yet despite the small return, brokers continue to do BPOs betting on the come that the asset management company will allow the broker to have the listing.

Even then, there are many steps to get to the golden fruit of a commission.

Brokers are often required by asset management companies to arrange the eviction of a tenant, to make repairs on the property, to rekey the property, and to maintain the property. Brokers often put utilities in their own name. All of this outlay of the broker’s money is done with no interest paid by the asset management company. Invoices and receipts are often paid within 30 to 60 days and can go as long as 90 days, says Hohl. On top of using the brokers’ money, the asset management company requires a 30 to 35 percent referral fee upon closing. Many times they delay payment or don't pay at all, as was reported in an earlier Realty Times story.

Some asset management companies are insisting that brokers will only get business if they support the company in other ways. They are requiring brokers to buy software products to access their REO systems and/or to attend company conferences. Brokers are color-coded so that the company will know when it is ready to distribute a lead which brokers are most invested.

But it is the time-consuming mountain of paperwork that gets Hohl the most.

”They require monthly reports, with comparables of other homes that are selling in the area, and quarterly they require a full CMA,” says Hohl. “This is what reduces your profits the most – spending all that time filling out forms. All asset management companies require this but their forms are all different, and they require them to be typed. Some are starting to allow you to fill them out on the Internet and that is saving me some time.”

Sometimes REOs can take as long as six months to a year to be put in condition for sale, so all of this work can be done with no guarantee of a listing. Worse, some agents are finding out that when they sell the home, the asset management company comes back and asks for a commission reduction, or they threaten to pull the sale.

Without naming any names, Hohl says that situation has just happened to another agent in his office. The asset management company claims that they sent the agent the wrong contract but that they will not pay the full commission they promised.

Why do brokers put up with low pay for their labor?

”With a consumer contract, the broker has control,” says Hohl, “but with the asset management companies, they have control because they have the inventory.”

He says that he has asked around, but is unable to find any brokers who are able to deal more effectively in negotiating with asset management companies.

New Jersey Realtor Karl Von Loewe says, "We haven't seen many inventory houses in a while, and I hope we don't. It becomes charity work. I guess the question comes down to opportunity cost. Is there something else you could be doing - like calling FSBOs and Expireds - that would generate more income for the time invested?"

”It’s their ball, so you have to play by their rules, but it’s not always about the money,” responds Hohl, “I work a particular neighborhood, and I want my name on signs, not my competitors’. You don’t want to be labeled as someone who is hard to work with.”

Hohl makes some extra money on property maintenance, which he is teaching his children to do, the way his father taught him. “My daughters are mowing lawns on these properties with my help,” says Hohl. “Sometimes they make more on the lawns than I do on the commission.”

“If I won’t do it, there is always someone who is willing to do it for less.”

Published: August 30, 2002

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