What you need to know before adding these services 
 

By Elyse Umlauf-Garneau

Yes, the subprime debacle has parched many markets across California. Yet some brokers are viewing the crisis as an opportunity to build pipelines for new revenue streams.

Carlos Aguilar, president of Axia Real Estate Group, Inc. in San Diego, spotted an opportunity by selling REOs, for instance, and its REO division, TeamAguilar.com, is bringing in about 80 percent of his business right now. “When I saw that the market was changing and it would be providing REO business, we changed hats and got into it last year,” he comments.

But changing hats requires some requisite knowledge and expectations. Beyond traditional real estate responsibilities of marketing property and negotiating deals, practitioners must have skills that include:

> Managing evictions and re-keying properties: Aguilar says the process often involves “keys for cash” deals in which money is offered to help occupants fund move-outs. The dollars, ranging from $500 to $1,500, serve as incentives to occupants and eliminate painful evictions.

> Preparing broker price opinions (BPOs): (For more on REOs and BPOs, search “Newsstand” at www.car.org for past articles.

> Cleaning, fixing, and maintaining properties. Frequently, houses are left in disastrous conditions. Aguilar has found trash-strewn yards and abandoned cars that sometimes require $2,000 to $3,000 to clean up.

> Ordering and maintaining utilities.

> Keeping clients (the banks or asset managers) abreast of market conditions and the progress being made in marketing and selling the home.

> Proper staffing: Aguilar’s team includes a transaction coordinator, who manages the stream of paperwork. A field manager visits properties weekly to ensure that they’re maintained and that squatters haven’t moved in. Also, he believes it’s important to have one point person to deal with banks so they don’t have to chase down multiple agents for questions and updates.

Among the advantages of selling REOs:

> Less angst: “The emotion of a stressed homeowner is removed from the transaction. You’re dealing with dollars and cents,” says Aguilar.

> Regular income: If you’re able to sell a house, you do make a commission. Depending on the bank, it typically ranges from 2.5 to 3 percent for the listing agent. If you’re working REOs through asset management companies, you can expect to share a portion of that commission with them.

> New clients: “Bank-owned properties get lots of calls,” comments Aguilar. “I now have four buyer’s agents working full-time on following up on those leads.”

Pitfalls include:

> Managing demanding clients: Each bank requires a sea of paperwork, and extensive rules and guidelines vary by institution.

> Time’s up: If you miss a deadline for expense reimbursements, you can be out your cash. And if properties don’t sell within a set period, banks can send properties to auction and you’ve lost the time you invested. Listing agreements usually run 90 days.

> Carrying costs: You’re fronting money to support the property while you have the listing. “You’ve got to be sure you have the financial ability to carry the property,” comments Aguilar.

Auctions: A Spigot of Future Business

Nate Minkel’s pursuit of auctions also stemmed from a sense that his Ventura market was changing. Minkel, of Troop Real Estate in Ojai, says auctions are not for bank-owned real estate or other troubled properties, but for motivated property owners seeking quick sales without the hassles of a traditional real estate transaction, Minkel notes.

Briefly, here are some auction fundamentals:

> Bidders must pre-qualify, and they’re allowed to visit the property. A bid package includes property disclosures, inspection reports, and so forth. Troop Real Estate develops a marketing campaign and promotes the property through numerous Web sites and print advertising venues.

> Speed: Successful bidders typically sign a contingency-free sales contract and closing usually takes place within 30 days.

> A buyer’s premium is added to the final bid and that premium is the agent’s compensation.

> Expanded service: Business stays with the real estate company when clients opt for non-traditional selling methods.

> Free advertising: Homeowners frequently pay marketing and advertising costs that can reach $20,000 to $30,000 for a luxury property. Yet Troop Real Estate benefits from broad exposure of its name through those outlets. Luxury properties, for example, appear in national magazines that reach wealthy buyers around the globe; property marketing is directed to other luxury agents.

> Commissions: The brokerage collects a buyer’s premium of 6 percent of the auction price, and it’s paid by the buyers, not the sellers.  “We do cooperate with other brokers who bring a winning bidder, and we’ll share the commission,” Minkel says. If owners opt not to pay for advertising, Minkel charges the owners a 6 percent listing commission and the brokerage also gets a 2.5 percent buyer premium. It’s compensation for the risk the brokerage is accepting. “We’re putting up all the money out of pocket and if a house doesn’t sell on auction day, we’re out all that advertising money,” notes Minkel.

> Marketing: At luxury home auctions, Minkel creates a party atmosphere with food and beverages and valet parking. Auctions have proven to be terrific venues for networking with prospective buyers and sellers, as well as for Troop’s ancillary businesses, such as its mortgage arm.

Some caveats:

> Be ready to educate people: It’s not unusual for Minkel to spend two hours outlining the auction process and what to expect to prospective clients and bidders.

> Training: A dearth of training options led Troop to do extensive research about auctions and create an in-house training program. Minkel found the book, SOLD!: The Professional’s Guide to Real Estate Auctions, invaluable.

> Unsuccessful bids: As with any real estate transaction, you could invest an enormous amount of time marketing the property and then have an unsuccessful auction. “There’s no guarantee of a sale, and you’ve invested your time and lost it,” comments Minkel.

> Be cautious about scheduling: Holiday weekends, bad weather, and fires affect bidder turnout.

Even if your competitors have a jump start on you, it’s not too late to add REOs or auctions to your business repertoire. After all, Aguilar sees REO business flowing steadily for some time. “Based on what I know, I’m prepared to see two more years of this,” he says.

And Minkel views the auction as an effective selling method, even in hot markets, pointing out that when a property gets 10 offers, you’re essentially in an auction. What if you advertised for six weeks and gathered a larger pool of buyers—say 20 to 30 people—and invited them to bid? “A house is likely going to get a bid way above the asking price,” comments Minkel. “When the market rebounds, the auction method is going to be a choice people will take because they’ll want to get top dollar.”

Elyse Umlauf-Garneau is a freelance real estate writer.

Pre-fab Brands

Weichert REALTORS® stopped opening new offices last year, and in early 2008 acquired two brokerages in Baldwin Park and Yorba Linda, converting them to its brand.

“It takes too long to do start-ups now, so we’re staying away from them,” says Steve Yeager, president-broker-owner of Weichert REALTORS®-Foothill Properties in the Inland Empire. “There are targets of opportunity with brokers who want to retire, or slow down, so we’re concentrating on buying them out and taking over their businesses.”

Established brokerages come with facilities already in operation, eliminating the need for large marketing expenditures and initial technical setup.

“You can pick up some really good people, too,” Yeager says. “You bring in new energy, better technology, and good management, and it motivates the sales people to become more productive. Last year, my biggest problem was finding an agent looking for an office. This year, we have interviews every day with people whose offices have closed down.”

To identify potential acquisitions targets, Yeager recommends the following:

> Look for markets with affordable homes, such as the Inland Empire, the I-15 corridor, Orange County, and areas with new home developments.

> Do a market study to determine whether one broker dominates the area, or whether the market is fragmented. Select markets where several smaller brokerages are operating.

> Use C.A.R.’s economic profiles and the MLS for sales information to determine if there are enough transactions in the area to sustain profitability.

> Go in with a business plan. If you’re a new broker, talk to experienced owners who have been through slow markets for advice.

“If a broker’s ready to retire, you can give him a down payment based on the value of his business,” Yeager says. “For example, if the value is $200,000, based on production, you can offer $100,000 today and an override on what agents will make over the next two to three years.”

Yeager says the biggest risk of acquiring businesses in a slow market is maintaining cash flow.

“If interest rates keep going up, it’ll get slower,” he says. “If you don’t have the investment or backing, you could really get in trouble. But there’s also so much more opportunity.”

–Dinah Eng