Tuesday, October 20, 2009

Bulk REO, Fact vs. Fiction: Part II, "Documents, Documents, Documents"

How many times have you seen this scenario. "I have a Bulk REO pool of 100mm in Southern California at 50+3, simply send me an LOI/NCND/POF/MFA and I'll send you the tape".

I'm sure like me, you've gotten dozens, maybe even hundreds of such emails, many even with an excel spreadsheet listing all the homes in the pool.

First, my client and I check the pool, and invariably MOST have anywhere from 5 to 10 different banks listed as "owner". How can a single pool be sold by a single "seller" (an entity that can legally convey title) when 5 or 10 different entities show up on title as the legal owner. The answer is they cannot. The only entity that I know of that can sell multiple bank assets is the FDIC and only from banks they have taken over. But as I covered in a previous post, the FDIC is not currently bulk selling. I know. I've tried, several times, through several channels, and each one has confirmed the same thing. They sell on a "one off basis" with a separate contract for each home, and they are getting near 90% of BPO. My client recently bid on 90 homes from the FDIC and they accepted 7 homes at a below 70% discount. And each have to be bought separately.

"LOI": Stands for Letter of Intent. In my career as a Commercial Agent I have drafted hundreds of these documents. They are offers, non-binding, and spell out basic transactional terms. They are signed by the buyer and seller as an agreement to business terms, and is the precursor to a PSA (purchase and sale agreement). In the Bulk REO world I have seen all sorts of LOI "templates".

"NCND": Non Circumvent Non Disclosure. I have a stack 2 feet thick of these, and I don't sign them anymore (neither do my clients). How many times have you been told "just sign my ncnd" and I'll get you on with the "seller". Upon which you are put on the phone with another broker, given another NCND and the cycle repeats. I can appreciate an "intermediary" wanting to make sure they get paid, but in this business, due to the chains of people (usually unlicensed and without a clue) these documents have become all but meaningless. I have personal relationships with my clients. I have their respect and loyalty. I don't worry about being circumvented. But in the Bulk REO world the norm is a chain of brokers, from across the country, none of whom have asked the right questions, qualified the deal, gained access to a "seller of record" (on title and legally empowered to convey that title at closing) who demand that their NCND get signed up front. RED FLAG.

The real deals I have worked on go as follows. My client gets an asset pool and verifies the owner (via title search) gets on a call with that seller to discuss it, an indicative bid is modeled and submitted which includes the broker fees, and if the principals can come to terms, a PSA is drafted. What happens if the seller wants 63 cents and the buyer underwrites at 64.5 cents but was forced to sign a 3% "fee agreement" up front? We all want to get paid. But the deal is worth what it's worth, and any Lic RE agent will tell you sometimes to make a deal, OUR commission becomes part of the negotiation. Invariably though there will be a "fee bully" in the mix who has some inflated idea of their importance in a deal, and the deal dies over "broker fees". I am all for "defending" my commission. But at the end of the day the banks want what they want, and the buyers will pay what they will pay, and if you can get them to agree, and there is something left over for you, do you take the deal, or let it die because it's not 3%?

"MFA": Master Fee Agreement. In a standard Real Estate transaction, the "listing" broker has established the fees to be paid up front in their listing agreement with the seller as well as the fee sharing with the cooperative broker. In the REO world, most banks also have an established fee they will pay Lic Brokers who consummate an REO transaction. Sometimes the fees are "added" to the net. The bank wants X the buyer will pay Y and the difference goes to the brokers. If your lucky, you have a deal where a full 3 or 4% is available. But this isn't a "set in stone" principal. So when I get a deal where some "broker" (again usually unlicensed and ill-advised) is dictating fees, I usually walk. They've never closed a deal anyway, and don't have control to begin with. So the first thing to check, once you have a real seller, is whether there is a fee being paid by the bank (or if a private seller, them). If not, then a discussion of fees with the buyer is in order, but in my experience this never takes place OUTSIDE the context of the deal.

"POF": Proof of Funds: Here is the biggest fraud that I've seen in this industry. ANY BROKER ASKING FOR A BUYER TO PROVIDE A PROOF OF FUNDS UP FRONT WITHOUT FIRST PROVIDING AN AGENCY AGREEMENT OR POA/LOA FROM THE SELLER/OWNER OF RECORD SHOULD BE SUMMARILY DISMISSED. When I list and sell Real Estate, my name is on the listing agreement, and my "authority" to ask for such a document is easily verifiable. The same is true in a Bulk deal. Only the seller of record or their fiduciary agent has any business asking for let alone recieving a POF from a buyer. So if they aren't a fiduciary agent (and prove it in writing) and ask for a POF, RUN! There are many Fiduciary Agents (real sellers "reps") out there. These companies routinely get hired by and sell distressed debt on behalf of financial institutions. And there are ONLY 5 (there were 2 when this post was originally written) authorized to sell FDIC debt from banks in Gov't receivership. But if some "broker" is claiming to have authority to ask for POF from your buyer, ask him to PROVE IT in writing. If he won't, no matter what the story, I suggest you RUN!