Luxury Clues

Bainbridge Island, WA

Stunning luxury waterfront home on Bainbridge Island.

Listing provided by Point2.

Thinking about Listing a REO--Real Estate Agents Beware!

Do you want to get in the REO business? It's a risky proposition that can have great rewards. Before you jump in and shell out your hard earned commission dollars in the pursuit of a big payoff, here are some major pitfalls that you must address. 

1.  You can get stuck paying the lender's bills

If you list a REO, in many cases, the lender will expect you to turn on the utilities in your name. I've heard of many cases where the lenders never reimburse the agents for the costs they incurred. Even when the agents submit their reimbursement request on time, it often "gets lost" or the agent can never get the person responsible to call him or her back. If you don't meet the lender's deadlines, you don't get reimbursed. This is not the case with every lender, but it is a major risk any time you take responsibility for the lender's bills.

2. Insurance

A major pitfall in some lender REO listing agreements has to do with insurance. Have your legal department review the documents to determine if the lender is requiring your company to become an "additionally insured" on your E&O policy or to indemnify the lender with general liability or workmen's compensation. If you sign a lender listing that has this provision, you may have committed your company to these provisions. The result is you and your broker will have to defend any lawsuit AND you will have to pay to defend the lender as well. Furthermore, there's a good chance your E&O won't cover it. 

3. Be wary of property management risks

If you are hiring people to repair the property, you are engaging in property management. This requires special insurance. One way to handle this is to set up a separate company that handled REO property management separate from your brokerage activities. Again, your regular E&O typically excludes property management activities, thus making you responsible for the costs of any litigation.

4. The lender wants you to carry the disclosure burden

This is a dirty little secret about which most agents have no knowledge. It's common for the REO listing agreement to require the agents to inspect the property weekly and to report on the property's condition. This means that you are responsible for reporting the defects. This is a serious issue because so many foreclosure properties have been trashed by their former owners. This lender trick puts the disclosure responsibility and liability on the agents. 

5. Do you really want to oversee repairs on the property?

When you supervise repairs on a REO listing, then you are responsible for those repairs. Again, have an attorney review the listing agreement to see if the lender has included a "blanket indemnification" that covers the lender and shifts all the responsibility to the brokers. One of the best ways to avoid the repair issue in any transaction is to simply give the buyer a credit for the repairs. If there is a problem, it's between the buyers and the person they hired to do the repairs.

To avoid signing a "lethal listing agreement," remember that all contracts are negotiable. Have your company's attorney review the contract first to find out if there are any issues. If the lender won't change the terms, walk away from the listing. Remember, a single lawsuit can cost a $100,000 just to get to court--that's not including any judgments. Those are the hard costs that don't begin to cover the costs to your business and your peace of mind. 

Bottom line: have those REO listings reviewed before you sign them, make sure you have the appropriate insurance in place, and avoid being a property manager unless you are set up to do so with the appropriate insurance and other necessary support. 

Posted by Bernice Ross, author of two of real estate's best selling books: Waging War on Real Estate's Discounters and Real Estate Dough Your Recipe for Real Estate Success