Expert: Watch Out for REO Disposition Mistakes

The ten biggest mistakes made when working with REO disposition can be avoided.

Whether in REO disposition or outsourcing environments, REO asset managers struggle with these issues and opportunities to improve.

According to CJ Gehlke, president and founder of REO Nationwide in Newport Beach, Calif., "You can't do everything yourself and retain efficiencies."

"You do have to stay involved to make sure it is done and done right. Even technology, which is not driven primarily by human effort, is dependant on oversight and monitoring, requiring human intervention from time to time. In this life, nothing can be trusted to run entirely on it's own. However, you can hone your own skills to better ensure success, minimizing complications down the line.

The number one mistake is seasoned inventory.

Sometimes a new asset has challenges and is going to be time consuming. How many times have you found an asset like this still in your inventory months later?

Solution: Outsource it to a firm and an asset manager with at least ten years experience and get it off your desk. Let experts who specialize in this pay the attention to it that would take you away from your other responsibilities.

Second most popular mistake is in how outsource vendor are chosen.

"We all want to trust big name brand companies," says Ms. Gehlke. "Do you know whom you are working with? Do you know how many years experience that person has? REO disposition is a combination of knowledge and intuition. It's not a quick skill to pick up and there is no school for it. Do they want you to sign a contract that locks you to them? If you're happy with their work, you'll stay. What happens if you are unhappy with their work at some point?"

Solution: Ms. Gehlke recommends that lenders choose two outsource vendors carefully and make sure to know the person who is in charge of your assets on a daily basis. "Working with two reputable firms gives you greater control and intellectual capital to draw from and makes the best fit for you easy to recognize. Always give the new relationships at least six months to season before eliminating a vendor," she said.

"When making your selection, note that some companies may put the focus on ads and strong salespeople, but your success is primarily in the hands of your asset manager. That person must have a strong and seasoned agent database, over at least a decade of tenure to allow for enough diversity of experience and can you reach them quickly at all times?"

How well and how fast they can perform is important, especially in 2008, lenders and servicers will be busier than ever before. "When you're busy, that is what you are unable to do for yourself, and hence, the very day value of a good outsource company," she said.

Mistake number three stands for "prompt cash for keys."

Evictions are costly and time-consuming, which is also costly. Cash for Keys can get the occupants out. Have you authorized Cash for Keys and then been told the occupants are still in the property? Solution: Get a different address and mail the Cash for Keys monies there after verifying the property is vacant and rekeyed.

How repairs are handled is another mistake.

No one can predict what will happen when a repair job gets underway. Ms. Gehlke asks, "Have you fronted money only to find the contractor has walked off the job? Have you approved your maximum allowance for repairs and then found the contractor ran into complications mid-job and is requesting additional funds? Have you found the subs were not paid and they have put a lien on your asset? Did you complete repairs only to have your asset vandalized? Or the most common of all, did you fail to authorize repairs that could have brought your company a hefty return on their investment at closing?"

Solution: Experience solves most all of these issues, she says. If any of this worries you, she suggests that you speak directly to the contractor(s) and find two separate and objective professionals who give you pretty much the same answer before you decide what to believe.

To protect yourself down the line, find two seasoned outsource companies and make sure your asset manager have at least 10 years experience.

"It is a great tool to have access to someone who knows things you don't and will not cost a dime to access their intellectual capital. Most outsource companies are compensated at closing out of the real estate commissions so you pay for results."

Overpricing is a mistake too.

Know your market and deliver the condition and pricing that will move the asset in a timely manner. Holding time costs money in many ways that are often too expensive to risk, says Ms. Gehlke. "At the end of it all, the price is what a ready, willing and able buyer is willing to pay. That determines the right price."

It is often the fist offer that is the best because the pool of people that have been waiting and looking all see the property come on the market. From that point on, it is just a new buyer here and there who join the buyer pool. Be quick to adjust your marketing.

Solution: Under pricing is rare but most easily resolved, she adds. Multiple offers can be encouraged by taking a few days to respond to an offer. If the property is genuinely under-priced, multiple offers will likely be generated giving you the opportunity to create a "bidding war" of sorts.

Counter back "highest and best" instead of a price. You may be pleasantly surprised at the result. "Over pricing is pretty easy to recognize. Nothing happens. The quickest solution is the tough choice to lower the price, offer more attractive terms and/or adjust the condition of the asset in ways desirable in the local marketplace." And finally, changing agents doesn't help the bottom line.