NEW YORK — Agents and brokers who want in on the action for short sales and real-estate-owned properties take heed: while that segment of the market should continue to grow this year, it’s not for the faint-hearted.

To break into the business, you need connections with lenders, and succeeding requires a high level of organization, commitment, and the ability to multitask, said L.J. Jennings, broker-owner of Oakland, Calif.-based Pyramid Real Estate and Investments.

NEW YORK — Agents and brokers who want in on the action for short sales and real-estate-owned properties take heed: while that segment of the market should continue to grow this year, it’s not for the faint-hearted.

To break into the business, you need connections with lenders, and succeeding requires a high level of organization, commitment, and the ability to multitask, said L.J. Jennings, broker-owner of Oakland, Calif.-based Pyramid Real Estate and Investments.

"The REO (bank-owned real estate) practice is very different from a traditional company where you are selling mom and auntie’s house," said Jennings, who teaches a certification course for Realtors who want formal training in the field. "I spend a lot of time in my course dissuading people from getting into it."

Jennings said many people come to him with unrealistic expectations that they are going to "make a ton of money in REOs." There’s money to be made, but if you don’t know what you’re doing, you can actually end up in the red. If a bank suddenly decides to give you 50 "assignments," that’s 50 lockboxes, 50 signs and 50 cleanups, Jennings said.

"You have $1,500 in out-of-pocket costs on day one," Jennings said, and it may take 45 to 60 days to recoup those costs through a sale.

Jennings has tallied up all the tasks that must be completed to list and sell a bank-owned property. There are roughly 145, he said. If you work with five asset managers, and each is providing 25 assignments a month, he said, the work "can multiply very fast," and requires a team approach.

Many agents and brokers would be glad to have such problems, and there are tools available to help those who want to get into the business, according to Jennings and other members of a panel dealing with foreclosures at the Inman News Real Estate Connect conference in New York City.

Making connections

Entry into the market may require building connections with asset managers who handle properties that have been foreclosed on, or finding distressed homeowners who want to engage in short sales. Another option is to look for buyers who are on the hunt for bargains, and willing to engage in the sometimes dicey business of negotiating with lenders on a short sale or REO property.

Building ties with asset managers is the key to getting REO listings, Jennings said, but it’s not easy to do.

"At conferences like these, asset managers wear their badges in their shirt pockets so people won’t know who they are," Jennings said.

He recommended that agents and brokers contact active REO brokers in their market, because the banks and asset managers they work with are often looking for other brokers.

"Take your REO broker out to lunch and ask for a referral," Jennings said, making it clear that you aren’t seeking to take business away from them, but for surplus work they can’t handle.

Panel moderator Rick Sharga, a senior vice president with distressed property data aggregator RealtyTrac, agreed that a subtle approach is best. He said he recently saw a broker take the wrong tack, walking up to another broker at a Florida real estate conference and asking, "Hi, my name is Sally, will you refer me to your asset manager?"

Even if asset managers are feeling hounded at real estate conferences, Sharga said such events can nevertheless be a good place for brokers and agents to connect with them. Events sponsored by DSNews and REOMAC are among the best industry conferences for this kind of networking, because the number of brokers is limited so loan servicers aren’t overwhelmed, he said.

Choosing sellers

While there are plenty of distressed homeowners — Sharga said RealtyTrac is about to release data showing about 2.5 million homes entered the foreclosure process over the course of 2008, and that he expects that number to grow to nearly 3 million in 2009 — it’s important to choose who to work with carefully.

A red flag to watch for is when sellers are unwilling to be engaged in the process, said Ann Stickel, vice president of affiliated services for Sarasota, Fla.-based Michael Saunders and Co.

"The seller has to want it more than anyone else in the transaction," Stickel said. "If they are wanting to keep a significant amount of assets, that will cause big problems with the lenders."

If the distressed property in question is not the seller’s primary residence, a short sale can also have serious tax implications — some borrowers may even be better off declaring bankruptcy, Stickel said. Borrowers may need legal advice on such matters, she said.

A homeowner who wants to attempt a short sale must be willing to provide a wealth of information showing the lender they can no longer afford to make their mortgage payments — a "dequalification" process. Some borrowers who made misrepresentations on stated-income, stated-asset loans may be reluctant to provide such information because it could expose them to accusations of fraud.

"We tell agents that when you get the call (from a distressed homeowner), don’t go to their house until you are convinced they have every document you told them was needed to complete the deal," said Scott Thompson, senior vice president, Mortgage Resolution Services.

Do your homework

Mortgage Resolution Services — a Fidelity National Financial company — works with real estate professionals nationwide, helping them navigate the tricky business of closing pre-foreclosure transactions. Agents and brokers are often frustrated that lenders and loan servicers are often unwilling or slow to accept offers on short sales and REOs that could save them from greater losses if they are forced to foreclose on a home or keep it in their inventory. Thompson said that part of the blame lies with agents and brokers who don’t do their homework.

"The real estate industry as a whole has done a poor job working with lenders, and as a result, (lenders) have a big chip on their shoulder," Thompson said.

To close a distressed property transaction, "you also need to qualify the property and the lender," said Sean O’Toole, founder and chief executive officer of ForeclosureRadar.com, which tracks properties in California through the foreclosure process.

There are a wealth of online tools that can help real estate agents and brokers find out crucial details about a distressed homeowner’s situation — even as they are talking to them on the phone for the first time. Knowing how many mortgages there are on a distressed property, who the lender is, and whether the home is upside down or not helps you "start to decide whether this is going to be a waste of your time," O’Toole said.

Once an agent or broker has identified characteristics that can make or break distressed property transactions in their market, they can look for other similar situations.

"Say you did a deal with IndyMac," O’Toole said. "Go find more homes with IndyMac (first mortgages), and farm those." In other words, focus areas where you’ve had success, rather than trying to take on every opportunity that presents itself.

Jennings said that when selling REO properties for banks, it’s important to be able to back up your valuations with a detailed broker price opinion (BPO) based on the latest information on the local market.

A BPO "takes a lot of time and energy, and you must be very detailed about it, arriving at a value based not on your interpretation but numbers showing what the market is doing," Jennings said. "I am fairly good at BPOs, but I cannot do one in under two hours."

O’Toole said ForeclosureRadar, which tracks distressed properties through the foreclosure process, can help determine where values are headed by offering a pipeline of foreclosure "comps."

That can also be a useful tool in getting homeowners to price to sell. He cites as an example a condo owner in a 12-unit complex who was shown that half the units were in the foreclosure process and four others already bank-owned.

"He aggressively priced and was in escrow and sold in a week," O’Toole said. Without that knowledge, he might have been stuck with the property.

With pre-foreclosures, it’s not always the best offers that get approved, Thompson said, but those that are shepherded by agents and brokers who have good relationships with loss mitigation officers.

While getting into the distressed property business requires knowledge and effort, in some markets that segment accounts for such a large percentage of sales that it’s hard to ignore.

Sharga said RealtyTrac recently compared about 500,000 properties in four states in the company’s database to MLS records and found only about one in four had been listed in multiple listings services.

"That means 60 to 75 percent aren’t listed yet, so inventory and price pressure will only get worse as banks push them out in full-bore mode," Sharga said.

Foreclosures may not bottom out until late 2010, Sharga said, adding that he thinks it will be "challenging for the industry to burn through the inventory overhang (and) get life back to normal."

In California, distressed properties are easily half of the market, O’Toole said. "How can you even call yourself a real estate professional if you have no clue about that half of the market?" he asked.

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