Bank-owned, foreclosed properties — also known as REOs — represent a huge opportunity for real estate agents and buyers alike, but can also pose a huge risk for your business.

Chances are you have seen an REO training ad proclaiming: "I just received over 100 listings from XYZ lender." Before you decide to devote time and money to working with REOs, carefully consider the dark side of listing and selling REO properties.

1. You can get paid for doing a "BPO"
Many trainers suggest that a good way to begin building an REO business is to provide a lender with "BPOs" (broker price opinions). BPOs are more complex than normal CMAs (competitive market analyses) and require agents to follow very specific guidelines. Lenders typically pay $50 to $80 for a BPO

Editor’s note: This is Part 1 of a two-part series. Read Part 2.

Bank-owned, foreclosed properties — also known as REOs — represent a huge opportunity for real estate agents and buyers alike, but can also pose a huge risk for your business.

Chances are you have seen an REO training ad proclaiming: "I just received over 100 listings from XYZ lender." Before you decide to devote time and money to working with REOs, carefully consider the dark side of listing and selling REO properties.

1. You can get paid for doing a "BPO"
Many trainers suggest that a good way to begin building an REO business is to provide a lender with "BPOs" (broker price opinions). BPOs are more complex than normal CMAs (competitive market analyses) and require agents to follow very specific guidelines. Lenders typically pay $50 to $80 for a BPO.

Money pit: There are several issues you must address before providing a BPO to a lender. A number of states allow only licensed appraisers to complete BPOs. In other states, only licensed brokers may complete BPOs. Check with your broker as well as your state’s department of real estate to determine what is legal in your state. If not, you could put your license at risk.

Even if it is legal for you to do BPOs in your state, a thorough BPO can easily take three hours to complete. Are you willing to work for $17 an hour until an asset manager finally decides to hire you? Or would your time be better spent in some other lead-generation activity?

2. The lender just listed a new REO with you and wants a written report detailing the condition of the property before setting the final price.
This sounds like a perfectly reasonable request, especially if the lender is outside your area. What harm could come from that?

Money pit: The moment you put any statement in writing about the condition of an REO property, you have placed yourself in a very precarious position. Are you really qualified to say that the brown stain on the ceiling is due to a roof leak and not from a beehive in the attic? Are you qualified to say that the foundation is sound?

The way to address this issue is to hire an inspector to check out the property in detail. The challenge, however, is the lender may expect you to pay for it. Once you have an inspection report, most states require that you disclose items on the report to potential buyers. …CONTINUED

In the past, I had lenders who paid for inspection reports and then refused to disclose the report to the buyers. They also instructed me not to reveal any items on the report. Their reasoning? They were exempt from filling out a disclosure statement. This is the kind of mess that results in litigation.

Because I was obligated to disclose any "material facts" pertaining to the condition of the property, my only choice was to make the disclosures in the report or to give the listing back to the lender. Failure to make the appropriate disclosures can result in costly litigation and possibly loss of your real estate license.

3. The utility reimbursement trap
When many agents take an REO listing they agree to switch on the utilities in their name. If you are listing multiple REO properties, you need a strong accounting system to track utilities and other expenses.

Because most agents lack an accounting background, they are unfamiliar with how to set up this type of system. If you’re not already running on QuickBooks or some other robust accounting system, you will either have to set up the system yourself or hire someone to handle it for you. You will also have to determine how to organize payment tracking.

One approach is to set up each property as a separate category. You can then create subcategories for various types of expenses such as utilities, rekeying, cleanup, etc. You must also track reimbursable expenses separately from your normal marketing expenses.

Money pit: The real issue is having your expenses reimbursed. Many lenders have a 30- to 60-day window in which to submit for reimbursement. If you miss the window, you don’t get paid. To circumvent this issue, submit your bills the day you receive them. Some lenders, however, require that you wait until you have incurred $250 in bills before they will accept a reimbursement request.

There are numerous online complaints from agents who were never reimbursed for REO expenses they incurred. Their expense statement was "lost," "never received," "wasn’t properly documented," or "didn’t make the deadline." Even if you make the deadline, the lender may not reimburse you until the end of its billing cycle, which is usually at least 30 days and can often be longer.

Making matters even worse, you may not get reimbursed at all if the lender is taken over by the Federal Deposit Insurance Corp. (FDIC) or purchased by another bank. Needless to say, if you make errors in the accounting, you also risk having issues with both the bank and the IRS.

To learn more about the risks of working with REOs, don’t miss Part 2 of this series.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.

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