A Real Estate Niche Profits From Rise in Foreclosures

By Dina ElBoghdady
Washington Post Staff Writer
Friday, December 28, 2007

Longtime real estate agents Barbara and James Newcomb decided three years ago to focus on selling homes that had been repossessed by lenders, certain that the housing market would falter and they could cash in.

The decision paid off. Today, the couple is handling the sale of 50 foreclosed houses in Maryland -- up from about 15 a year ago, said Barbara Newcomb of Don Gurney GMAC Real Estate in Glen Burnie. "We've hired three people to work for us since September."

As the number of foreclosures rises, the niche industry devoted to helping lenders quickly offload these properties is flourishing, fueled by an influx of traditional real estate agents looking to supplement their income during a protracted housing slump.

The homes, known as REOs for "real estate owned," are those that lenders failed to auction at the courthouse after borrowers defaulted. Subprime borrowers in Virginia, Maryland and the District lost 8,000 of these homes to lenders in the year ended September, up from 842 the previous year, according to estimates by First American LoanPerformance.

The more of these houses lenders dump on the market, the more lucrative the REO industry gets and the more players it attracts, including title lawyers, cleaning specialists, appraisers and information technology firms that help lenders track their properties.

"Everybody right now is trying to get into REOs or they're trying to make a buck off of someone trying to get into REOs," said Michael P. Krein, president of the National REO Brokers Association, a 10-year-old trade group. "It's a cycle we've seen before."

When the market is thriving and foreclosures are few, the REO industry shrinks. When the market sours and foreclosures soar, the industry expands because of a lender-driven hiring spree.

The hiring starts in-house. When foreclosures rise, lenders beef up their teams of asset managers. Those managers hire people to handle the logistics of selling those homes.

"The lenders need people on the ground to do the grunt work, to make sure that no one took all the toilets out of a house," said Guy Cecala, publisher of the trade publication Inside Mortgage Finance.

That demand inspired Ronnie Ory to get out of the home building business and concentrate on cleaning and preserving foreclosures back in the 1990s, when Florida's housing market tanked.

Today, Cyprexx Services, based in Tampa, taps into a network of subcontractors nationally, including in the District, Maryland and Virginia. In this region, the firm has about six times the number of foreclosures as last year, Ory said.

"We stuck with this business because there will always be some foreclosures," Ory said. "We make it work just by basic business planning. We stay light on our feet and use subcontractors all over."

Others keep finding new niches. More than a year ago, Maryland real estate broker Kevin Goodnight launched REO Hotshots, a Web site where lenders can search for real estate agents his firm says it has vetted.

The members-only site -- which also lists appraisers, title lawyers and contractors -- charges lenders $249 a year. Agents and contractors pay $999 annually to get their names in front of these lenders.

The Web site and others like it hope to profit from the lenders' need to offload foreclosures as quickly as they can. The longer they hold these properties, the more money they lose.

"Many of these lenders are completely overwhelmed right now," Goodnight said. "They don't want to waste lots of time looking for agents or contractors, and they don't want to take anyone by the hand when they're this busy and teach them how to get the job done."

The premium on experience helps the Newcombs.

The couple eased into the foreclosure business at the height of the housing boom, when many borrowers were refinancing their homes. At the time, lenders needed to quickly determine the value of those homes and a handful of them hired the Newcombs to do "broker pricing opinions" at $35 to $150 each.

Those contacts came in handy when foreclosures rates surged this year. They completed 2,500 broker pricing opinions for a dozen of their lender clients -- up from 1,300 in 2006.

"That line of work gave us a chance to prove ourselves to the banks and develop a rapport," Barbara Newcomb said. "That's why we managed to get so many foreclosure listings when the market went bad."

These agents, like others, make their money in commissions.

The larger their inventory of homes, the more they are likely to sell. And the higher their prices, the better the commission.

The Newcombs say selling one or two houses a month keeps them going. They have eight under contract that are scheduled to close this month or next, including one that's selling for $575,000. Their most expensive home is listed for $769,000.

"We're going to be looking at a good January and February," Barbara Newcomb said. "I'm sure we'll be seeing more sales in March and April, but if we don't, what we've got so far is enough to tide us over."

But the foreclosure business isn't for everyone, said Krein, head of the National REO Brokers Association. "Think about it. It takes a certain type of person to clean a crack house. It takes a severe Type A personality. About 40 percent of our members are ex-military in some form or another. They understand that you have to follow rules and do what you're told."

The other thing these real estate agents need: deep pockets. Agents typically pay upfront for cleaning and repairs, homeowners association dues, lawn maintenance, lockboxes and snow removal, Krein said. They also take on the water, gas and electric bills.

The Newcombs said lenders owed them as much as $60,000 at one point. The couple pays about $5,500 a month in gas and electric bills alone.

Bob Norrell, a senior vice president at Litton Loan Servicing, said he marvels at how complex this niche market has become. Norrell, whose firm collects payments on thousands of mortgages, said that he managed all his bank-owned properties on a single Excel spreadsheet for 20 years.

"Now the brokers and Realtors are uptight about all the information that's required of them," he said.

Norrell cites the vendors who set up booths at a recent conference he attended in Dallas, where more than 2,000 rookies and industry veterans gathered. Some offered software that banks can buy to track their homes and assign homes to agents. One offered a network of foreclosure-prevention gurus that lenders could hire to negotiate with borrowers.

The complexity of the market is why Cary Sternberg, a vice president at IndyMac Bank, wants to hire agents with at least two years of REO experience.

At the Dallas conference, Sternberg held workshops in the ballroom of the Hilton Anatole and told the crowd that just about everyone he knows in turn knows someone in the real estate business who wants to sell foreclosures.

Most of those wannabes are agents who sold plenty of homes during the boom years and think that experience will translate to the foreclosure business, he said.

"I've got to weed out those people because they do not understand the REO business," Sternberg told the crowd. "They're just looking to supplement their income."

The speech did not discourage Deirdre Glascoe, a self-described "newbie" who's not shy about wanting whatever extra money Sternberg can bring her way. Glascoe, an agent at Murchison-John Realty in the District, said she worked on government contracts in a previous career and understands that it takes patience to win a client.

"If [Sternberg] needs a job done in a certain market and the only one available is the newbie he does not want, guess who he's going to hire?" Glascoe said. "He's not going to come to XYZ street in Bowie from Austin to do his business."

With that, she grabbed one of Sternberg's business cards -- contact information printed on a fake $1 million bill.