Nearly everyone knows that there are an alarming number of foreclosure properties right now and the real estate owned (REO) volumes appear to be increasing with each passing quarter, with a possible bubble bursting early in 2011. This is in addition to historical high levels of loan modifications and pre-foreclosure sales (“short sales”). Those in the industry are well aware that mortgage servicers aren’t in the business of selling residential or commercial real estate, at least not by choice anyway. But perhaps no one understands this better than the real estate brokers who scoop up REO listing assignments at sometimes alarming volume levels.

As new property assignments are placed, the asset managers working for servicers and REO outsourcers breathe a sigh of relief because they think — at least with some degree of confidence — that they are getting help from someone who is actually going to market and managing and selling those properties at a local level, hopefully to owner occupants, whenever possible. But on some occasions, the reality is that they could get a self-servicing agent looking to capitalize on market dislocation. The stated goal for REO disposition may be to help stabilize communities and neighborhoods while promoting homeownership, but that isn’t what appears to be happening.

Recent inspections have shown defects on listed assets such as unsecured homes, a lack of practical maintenance (utilities on, grass cut, newspapers removed) missing lock boxes or yard signs, properties not in the MLS or in the wrong MLS.

In some cases, interested buyers have been ignored (as documented in “secret shopper” campaigns). This is not to suggest that all or even most of the REO listing agents are doing a poor job, it is to suggest that as volume levels to some agents has increased there may be a direct correlation to declining service levels that should be understood.

So what is the potential risk exposure of using an under-performing REO agent? One hypothetical example is shown below:

If this example is reasonable, it is not hard to see that potentially an unbelievable amount of recoverable dollars continue to be at risk of being lost.

A simple question is how do you know with a degree of certainty that your network agents are performing as expected? Are you completing independent inspections, reviewing MLS comments, employing secret shopper campaigns? Do you have a robust training program and performance based relationships, or a culture of familiarity with certain agents that have been with you for years (not a bad thing if it is also backed by results).

What steps can be taken to improve performance?

• Training (should be mandatory, and comprehensive with testing of the coursework analyzed, classes should be accessible (online). It should be continuous; process and objectives change, as does technology
• Accurate agent performance scoring with asset allocation tied to results
• Effective Service Area (ESA) distances – keep them close to the assets
• Should a open assignment cap be employed at say 20 to 30 in all status’ at any given time
• Quality control based valuation practices to improve accuracy
• Eliminate process inefficiencies (yours and theirs)
• Should newer agents be added to networks to create competition and instill a degree of urgency?
• Would a re-allocation of your REO agent network also afford an opportunity to review network diversity and participation levels?

Again, the vast majority of the real estate agents do their job. But, in those instances when they do not the risk is huge. How will potential homebuyers know a house is for sale if there’s no sign out front? How will selling agents show the home if there’s no lockbox on the property? How is anyone supposed to know whether a broker really wants to sell houses if they do not return phone calls to persons expressing an interest?

We will continue our property inspections and secret shopper calls, continue our Default School training classes and live sessions (which are producing dividends), continue to performance score our network agents and assign properties accordingly, and we will continue to have an inclusive supplier network. Performance and accountability is King.

REO sellers may be suffering at the hands of some agents, but there are actionable items available to eliminate (or reduce) this risk and some have been outlined above. The longer a house sits on the market, the further it falls into disrepair, the risk of vandalism increases, and holding costs increase.

The faster this industry converts these non-performing assets into occupied homes the better for all concerned.

Any competent broker working in the best interest of the client will do the work to sell the property as soon as possible and get the best possible price. This takes work; an investment of time and money as well as advertising and maintenance.

REO sellers want to work with the best brokers in every market, and there is nothing wrong in working with large volume brokers and agents, but competition is good for free markets and REO asset management as well.

REO sellers today know that when it comes to REO, choosing the right broker to list the property is not a decision to be taken lightly.

Frank Marshall is co-founder and President of Default Resource.