The Opportunity - "An estimated $250 billion in loans will mature this year, with $300 billion more coming due in each of the next three years, "With property values down 40 percent for some office buildings since the recession began, owners are in a bind. Worse, values are still eroding: By the end of 2010, they're likely to lose an additional 10 percent." This results in an inevitable tsunami of commercial defaults and a tremendous opportunity for well positioned REO brokers. The 2009 National Association of Realtors® Commercial Member Profile of more than 81,000 of NAR's 1.2 million members found that the median sales volume in 2008 was down nearly 10 percent since 2006, resulting in a 13.6 percent decline in median income. Most commercial brokers are working harder for less commission and deals are few and far in between and shared in most cases. Diversification is key to navigating these uncertain times. Handling the disposition of bank-owned commercial real estate properties was once a relatively small portion of the work handled by commercial brokerages. In today’s market, REO work is becoming a much more prevalent, and coveted, area of expertise. "REO work currently is and will be an integral part of our business model for the foreseeable future.”

Originator/Lender

Property Type

Loan Size

Owners

Financing

Accessibility

Institutional Expectations- Normally, commercial real estate brokers are well versed in their markets and have a good grasp of the financial status of the asset in which they are going to lease, dispose of, or acquire for a client. They have a strong understanding of the basics within a building and how to "package" a building for offering memorandums, whether it is for leasing or acquisition/disposition.

While residential REO brokers are well versed in dealing with institutional timelines and have become accustomed to a "hands on" approach of disposing of assets, whether it is for re-keying, trash-out services, or approved capital improvements. They understand that the key to receiving more listings is to be diligent, efficient and constantly meet or exceed the expectations that are set forth.

REO Department - When the last step in the loan-asset management process is reached, after forbearance, modification and foreclosure, the asset becomes Real Estate Owned. The REO department of a lender or loan servicer has two primary objectives: Management and Disposition. The goal of the management portion is to stabilize the property, address imminent issues, maintain and enhance cash flow and minimize expenses and holding period. The Disposition portion seeks to maximize net proceeds by selling the asset at the best possible price in the best possible timeframe.

Asset Manager's Role - The REO Asset manager is in charge of a portfolio of assets varying in size based on the type and complexity of assets. Commercial REOs demand more attention and have many more variables to the management than the average residential REO. Likewise, large commercial REOs will be more complex and management intensive, requiring a lot more of the asset managers.

The asset manager is responsible for the proper administration of all aspects of handling the property throughout the holding period all the way to the successful disposition. The asset manager completes the Asset Decision Analysis with the data gathered in order to determine fair market value, list price and repair budget. The asset manager will establish a marketing or business strategy for the property which may include leasing, renovating and stabilizing in addition to the sale. He or she will also identify and hire the listing broker, and will receive and negotiate purchase offers. The final offer approval is generally subject to review and authorization by upper management and executive committees that will ultimately decide whether to accept or reject the offer.

Broker Selection Criteria

Terra Asset Management seeks brokers who have: REO Experience, Market Knowledge, Property Expertise, Recent Closings, Active Listings, Support Staff, Field Servicing & Property Management.

Broker as a Resource
Brokers who are selected should be: Proactive, Thorough, Efficient, Punctual, Accessible, Realistic, Sincere & make asset manager’s job easier by assisting him in overseeing the property.

Broker’s Assignment – Pre-Market
When Terra Asset Management receives a new Asset that just came REO, the first thing they must do is identify the agent that is best suited to handle the job. Going through the checklist discussed earlier, they select the listing agent and proceed to assign the property. When we look at the definition of the verb "Assign", it refers to "the selection and appointing for a duty" as well as --the transfer of property to trustees for the benefit of creditors". In that sense, what the lender or servicer is doing is relying on the broker to act as if the property were "assigned" or transferred to him or her. In other words, expect the broker to act as if the asset were his or her own property.

The asset manager will have a conversations with the broker prior to the assignment to assess the broker’s aptitude, willingness and feedback. He will provide a basic summary of the property, situation and any sensitive items that need immediate attention such as violations, major damages, etc.
The broker is expected to provide a full report on occupancy status within the first 24 hours.

Vacant – Re-key, Trash out, Personal Property, Equipment
When the property is vacant, the broker should immediately take possession of the property by securing and controlling access. It is recommended you have a locksmith with you at the initial visit so you can promptly have control of who enters the property. In many cases, what is found upon entering the property may not be the prettiest sight. There may be extensive amounts of junk and debris left behind. If that is the case, the agent will make arrangements to have the property cleaned and all trash removed.

In some cases, there may be some items left behind by the previous owner, in which case an inventory will be provided. These could range from equipment, furniture, machinery and even vehicles. You will generally have a few more days to provide a more detailed assessment of quantity and value of these items, depending on the amount and complexity. In most cases, the commercial real estate loan has provisions to include the fixtures or equipment as part of the collateral via UCC (Uniform Commercial Code) filings. The UCC rights on these items may be an essential component of the collateral, for example, in cases such as hotels, restaurants, retail stores, etc. If it is determined that there are no UCC filings or the property is not part of the collateral (vehicles, copy machines, faxes, furniture, etc.) then a personal property eviction process may have to be filed in order to remove and dispose of them properly. This process will be handled by a legal professional that is selected by the lender.

Occupied
If the property is occupied, the agent must assess the occupant’s intentions. Are the occupants the former owners or are they tenants? An amicable and sensitive approach should be attempted to remain on the best terms. The best case scenario is encountering cooperating occupants who will assist in the transition by either moving out or making arrangements to remain in the property. In most cases. the asset manager will want to keep the tenants in the property if it is an income generating asset. In this case, the broker will have to draft new leases with all tenants, generally month-to-month with a 30 day notice. The premise for a month to month lease instead of a longer term lease is that the lender or servicer's holding period is expected to be temporary. The next owner may want to vacate the property to complete renovations, re-tenant the space, enhance cash flows, occupy it themselves, etc. Some asset managers choose not to collect security deposits with the new leases in good faith to the tenants given the fact that they may have already lost the deposit collected by the former owner. It is worth noting that after the foreclosure occurs, in some states, the new owner (the lender) is not liable for reimbursement of security deposits held by the former owner. The asset manager’s decision to lease the space will be generally aligned with the most effective marketing strategy. The broker’s input and feedback is very valuable at this time.

On the other hand, if the tenants are non-cooperative, look at Cash for Keys as an option. In a CFK scenario, the lender will provide a form that sets an agreement for the tenant to receive a specified dollar amount for delivering the property in agreed upon condition on a specified date. The broker may be expected to advance the funds and later seek to be reimbursed. A successful CFK arrangement will be of great benefit in that it avoids having to enter an eviction process. Evictions can be a very long and expensive process that delays the marketability of the property and impedes the potential for generating income through an otherwise paying tenant. We have seen tenants become a lot more knowledgeable of how the system works and are becoming craftier in delaying and extending the eviction process by not responding to notices, avoiding servers, filing continuances, requesting trial hearings, etc. In this case, the lender will generally handle the process through referral to a local legal professional.

BPO Package
Once the agent has control of the property and the occupant scenario has been addressed, the next item of business is presenting to the lender the current market value of the asset by preparing a Broker Price Opinion.

The most important premise is that this is your opinion of value and your best assessment. The most important skill required is a combination of a solid understanding of the asset with a thorough knowledge of your market. Local market data is key in understanding the context of your valuation as the people reviewing this report are usually in a different market and may not understand the details of the scenario.

It is always best to prepare a cover letter or an attachment to the BPO package where you go into further detail. Be explicit and thorough.

The commercial BPO presents the lender with a reconciled value based on a market valuation (based on comparable market activity) and an income approach (based on the cash now and the market cap rates). An income analysis will usually be necessary to provide an accurate indicator of property value. Be sure to consider the extent of deferred maintenance and understand the impact on the AS-IS value of subject.

The broker’s BPO must include detailed information on: Description of subject property conditions, Deferred maintenance (details and costs), Income & operating expenses (Determine NOI & Market CAP rates), Market value trends, Closed Sales, Active Listings and Rental Comparables.

Terra Asset Management expects to receive a BPO that reflects the actual and current market value of the property. The number that they are looking for is not the long shot potential of the best possible case scenario of how much it might be sold it for. Sure, it is an opinion and is therefore subjective, but at the same time it must be objective and grounded on the reality of the market, value trends, comparables' DOM, recent closings, property condition, etc. Remember the goal here is to list to sell, and the price must be realistic. The asset manager expects fully completed forms, properly inserted pictures, evidence of comparable information, attachments, etc. to be presented in their preferred format. Make sure you understand their preferences so they remain satisfied with your work.

BPOs must be updated at least every 2 months. Some lenders only have a window for re-valuing the asset but may be willing to look at a new BPO when significant changes have occurred in the market.

If a camera system is needed, we obtain at least 2 estimates, negotiate costs and appropriate products to be used.

If the property has security guards, we assess the security company providing the guards, the number of guards working each shift, number of shifts, the duties of each guard and negotiate the costs per guard.

Janitorial

We negotiate the rate per square foot, number of janitors needed, hours and the supplies with the janitorial company, then determine whether the janitorial company should provide the cleaning supplies or if it is more cost effective to supply them ourselves.

Landscape
Landscaping is the easiest way to affect a large aesthetic change on a property for a very little capital investment. We meet with onsite management and the landscaper to decide what improvements need to be made. Review the landscape contract making sure that the contractor has completed their obligations. Routine color changes and trimming should be included. Also, make sure that the contract rate is appropriate for the market.

HVAC
Make sure that the servicing contract is not just an "insurance policy" that only covers minimal repairs. All repairs on the systems should be included in these contracts, if there is a building engineer associated with the building there needs to be a serious conversation about whether it is necessary to have a HVAC vendor. Check other vendors’ prices.

Elevators
These are very important vendors within the asset, not only do they maintain the elevators they also hold very large insurance policies which protect the building and ownership from lawsuits which stem from elevator / escalator related incidents. We verify that a log is kept in the elevator equipment room, that it is being filled out and that the room is being kept in a neat manner.

Parking
These vendors’ responsibilities vary. Some are cleaning companies that send sweepers to keep the lot clean, For some properties parking is a source of income and the parking vendors handle all aspects of the parking transactions such as:

Terra Asset Management audits the condition of the lot and the onsite manager’s oversight of the accounting.

Terra Asset Management uses industry standards to figure the valuation of assets. The following is an example.

Net Operating Income ( NOI) Calculations and Capitalization Rate (Cap Rate)

NOI is equal to a property's yearly gross income less recurring operating expenses. Gross income includes rental income and other income such as parking fees and should include all income connected with a property.

NOI is used in two very important real estate ratios. It is a crucial part In the Capitalization Rate calculation that is used to estimate the value of income properties. A Cap Rate is the (NOI) divided by the value of a property expressed as a percentage. Assume we have a market Cap Rate of 10 for the property we are purchasing. (A market Cap Rate is calculated by researching the financial data from the sales of similar income properties in a market place.) The following is how we estimate the value of an income property with a NOI of $140,000:

Capitalization Valuation

Estimated Value = NOI .

Market Cap Rate

Estimated Value = $140,000 (NOI)

.10 (Market Cap)

Estimated Value = $1,400,000

Investors and lenders use the Cap Rate to estimate the purchase price for all types of income properties. The Cap Rate calculation combines a property's selling price, gross rents, non rental income, vacancy amount and operating expenses making a more reliable estimate of value.

It is important to understand the capitalization rate of multiple comparable deals that have transpired within the market to give you an accurate market Cap Rate. Investors expect a higher return when investing in high risk income properties. The Cap Rate may go up or down in different areas for reasons like location, level of crime and general condition of the area. Lower Cap Rates should be expected in newer and more desirable areas of the city and higher Cap Rates in less desirable areas to account for the added risk.

We use the income approach to estimate the market capitalization rate of income properties like office buildings, warehouses, apartment buildings and shopping centers. Determining the Cap Rate is achieved when financial data is available for recent sales of similar income properties in a given area. A property’s net operating income and sales price are used to calculate a Cap Rate for the sale of each similar property in a given area and those cap rates are averaged to determine the Market Capitalization Rate. To begin the process first Determine the NOI of the assets that are being analyzed.

Determining NOI

Income

Gross Rents Possible $200,000

Other Income +6,000

Potential Gross Income 206,000

Less Vacancy Amount -4,000

Less Operating Expenses -62,000

Net Operating Income (NOI) $140,000

Once the Net Operating income is determined a Cap Rate is calculated. This is how the Cap Rate is calculated if the above property was sold for $1,400,000.

Determining a Deal’s Capitalization Rate

Cap Rate = ­­ NOI .

Sale Price

Cap Rate = $140,000 .
$1,400,000

Cap Rate= 10%

 NOI's Effect on the Valuation of a Property
Often, management companies will say that they keep operating expenses to a minimum in order to save the owner of the building money. When Property Managers are asked the simple question, “How much money are you saving the owner?” They can tell you (this is the easy part). When asked, “How much valuation did you add to the property?” They have no clue how to answer.

NOI has a profound effect on the valuation of an asset. From a $1.00 sq ft. annual drop in operating expenses, you can make a huge difference. The following is an example of the net effect a $1.00 drop makes, we are going to use a 100,000 sq. ft. building (it does not matter what the current expense number is. We are looking for net effect).

Reduction of Operating Expense

Reduction= 100,000 sq. ft. x $1.00 drop = $100,000 reduction

Change in Value = Change .

Market Cap Rate

Change in Value = $100,000 (Change )

.10 (Market Cap)

Estimated Value = $1,000,000
This is powerful to have this ability when dealing with financial institutions. Banks will have a better level of comfort if they know that there is an understanding of this concept. Of course, there can be the inverse effect if operating expenses rise.

Listing Management and Maintenance
In most cases, the basic management expectations are stipulated in the REO listing agreement. For a more management intensive assignment, a separate agreement will be prepared. The general premise is that the agent is the assignee of the property representing the owner and advancing their interests. The broker is expected to take over utilities, regular maintenance and to cover basic expenses associated with running the property and then be reimbursed for these expenses. It is reasonable to receive payment within 30 days.

Work Bids and Estimates
Lenders will require a certain number of bids before approving the work. In a small commercial asset, generally no approval is needed for items under $1,000, 2 estimates required for work up to $5,000, and 3 estimates for work above $5,000. The asset manager’s approval parameters may also vary, requiring management approval for items outside of estimated budget such as major mold remediation, new roof, major plumbing, electric, etc.

Proper Forms
The proper documentation according to the preferred format is essential in expediting the timely processing of your request for reimbursement. Remember, asset manager's time is limited and they want to spend the least amount of time possible in administrative processing.

Payable to the Broker or Vendor?
In small commercial properties, asset managers expect brokers to cover most expenses but are generally reasonable in these expectations and will not require out of pocket expenses beyond the broker’s capacity. The reasoning here is that for internal accounting purposes, it is not possible to have W9 information for every single vendor doing work on every asset in the portfolio of the REO department. Minimizing paperwork is the key.

Invoice
Make sure the invoice is clear & itemized if possible.

Proof of Payment
For each item listed, send a copy of a Check, credit card receipt payments

W9
With the tax ID number for the payee - For either the broker or for the vendor.

 Pictures
Supplying before-and-after pictures of a project will provide verification that the work was completed and helps the asset manager understand the scope of the situation to justify the expenses.

Maintenance for Vacant Properties
The property should be maintained in good, clean and show-ready condition at all times. Despite the simplicity of tasks associated with maintaining a vacant property, many brokers overlook some basic items that may seriously complicate an otherwise simple situation.

Preservation
Any major items that need to be addressed to preserve the integrity of the property should be dealt with at this time. Roofing, plumbing, electric, mold, etc. Make sure you have identified any existing points of concern and gather estimates of cost to repair. The asset manager will be able to make decisions based on the information you provide, so again, resourcefulness, thoroughness and efficiency are key.

Citations
The most important thing is to address any pending code violations and further prevent them from re-occurring. A code enforcement violation is a major red flag for your work ethic, as well as for the asset manager's handling of his portfolio. Many agents have been fired for failing to address basic items like these.

Lawn Maintenance
The landscape should be kept in the best possible condition while the property is under your supervision. The lawn maintenance should be on automatic schedule every month and is generally expected to be completed without need for authorization.

Snow Plowing
Same as lawn maintenance. it should be done immediately, as necessary and driveways and entrances must remain free of ice.

Winterizing
When the fall arrives, all properties in winter weather areas should have the plumbing system winterized. Too often agents forget to complete this item and usually results in major expenses and marketing delays when the pipes crack and burst, flood and even cause mold issues.

Secured Subject
A vacant property should also be fully secured. Access should be controlled by the agent at all times. In areas with a propensity for break-ins, the possibility of boarding some or all doors and windows should be considered. Vandalism and squatters present a major risk to the integrity of the asset.

Maintenance for Occupied Properties
In addition to all the items listed above for the maintenance of vacant properties, an occupied asset requires additional attention. Whether it's a single tenant or a multi-tenant property, the course of action follows the steps above with an emphasis on stabilization.

Stabilization
Part of the business strategy for income properties is to turn vacant units into rentable ones, and bring in tenants to generate some cash flow. The parameters for completing a stabilization of the property vary widely depending on a number of different variables. How much work is needed? How much will it cost? What is the potential return? Is it realistic?

The broker’s assessment in answering these questions is key to the asset manager's decision. He should communicate to the asset manager an opinion on the best way to proceed, from the perspective of the owner of the property.

Property Management Agreement
Often, the agent acts as the property manager and should follow the customary terms of a typical agreement. Some variations may be applicable to adhere to the general strategy for rehabbing, leasing and general stabilization. Some examples of variations to the agreements can be the percentage of collected rents, a minimum monthly maintenance fee and the parameters for authorization prior to incurring expenses, leasing fees, legal fees, evictions, etc.

Depending on the type and size of the property, a separate addendum to the standard property management agreement may be applicable to specify further details of the lender's expectations.

Basic Expectations on Property Management

Leases - Should be drafted by broker on a month-to-month basis. The standard state form can be used or a simple format may also be sufficient. The idea is to formalize the landlord-tenant relationship with the new owner.

Rent Rolls - A detailed rent roll should be provided to the asset manager every month. It is important to have an updated status of the occupants, their payments, balances, notes, cash flow numbers, etc.

Management Account – Terra Asset Management prefers the broker to establish a separate account for monies received from which funds may be drawn to address regular maintenance items. The objective is to minimize paperwork and allow flexibility for action. A monthly account statement must be provided to the asset manager along with the updated rent roll every 30 days.

Property Management – In-house or Third Party?
The most common scenario is to work with a broker who provides property management as part of their service, whether it's the agent himself or a division of their firm. This is viewed as an advantage as the asset manager deals with one single point of contact for all aspects of the listing and has the benefit of having all pertinent information readily available at all time. Some brokers will hire a third party firm or individual to handle the property management component of the listing. This is not the preferred method but may be acceptable depending on the circumstances.

Anticipated Revenues
Even with the expenses completely under control the most important people within an asset are the tenants. It is extremely important to be able to effectively interact with the most important sector of Property Management.

Tenants
Tenants provide the largest section of revenue for the asset and it is imperative to treat them with respect and make sure they are happy and want to stay when their lease comes due. Some of the main responsibilities in regards to tenants are:

Leasing
Commercial Real Estate and Lease Classifications

Office
The office market is generally defined by the quality of the commercial office space and ranked as follows:

Class A office spaces are of the highest quality office available in a particular market. These assets offer the highest quality in finishes and also have the most amenities. Most commercial office space of this caliber provides office space for lease by suite.

Class B office space listings are the second highest quality of buildings available in a particular market. These commercial office space buildings also offer office space for rent suite by suite.

Class C Office space for lease is generally defined by suboptimal office space in less than desirable areas or the office space for rent is dated.

Office space listings are generally leased by the year, but the office space rental market offers other shorter term options. Some office space for lease may rent by the month available in executive office suites. The office space for rent in executive office suites is the most flexible in the market but generally goes for a premium over the traditional office space rental market.

Industrial
Industrial space is characterized by a mix of office space, R&D and some amount of warehouse, production area and/or lab space. There is usually a loading dock with a roll-up door and a ramp that is adjustable to the height of the truck bed for easily offloading of shipments.

Industrial space for rent is usually setup on a Triple-Net (NNN) lease structure. The NNN is typically a structure you will see for a single tenant office, R&D, or industrial building.

Retail
Retail space consists of an asset that is for the sale of goods or services. Most of the time, retail space is available on a Triple-Net (NNN) basis and has a separate utility meters for each tenant. Some Restaurant and Retail space leases are negotiated on a percentage of gross receipts with some sort of sliding scale.

Multi-Family
A type of Commercial Real Estate asset with multiple units, that is classified as income producing. Condo buildings and duplexes can be considered multi-family residences; but with a duplex, both the property and the land are recorded on one deed. Whereas with a condo, the owners only own their individual units, not the common space or land, and each have their own deed.

Your Listing – On Market

So now, the property has been valued, the list price is set and we are ready to make the property available on the market. At this point, the broker will receive the completed Listing Contract to officially list and sell the asset.

Listing Contract

The listing contracts used by most REO lenders are very similar in terms and obligations across the industry. They generally contain all the terms of the typical listing agreement with some additional provisions pertinent to the REO assignment. Unlike a normal seller, the lender expects a higher level of involvement and reporting from the listing broker, and the listing agreement will specify what these expectations are. It is worth noting that 99% of the time, the lender will not allow any modifications to the language of this listing agreement.

Even though the listing agreements contain very similar language across the industry, each lender has their own proprietary format. For a small commercial listing, some of the unique characteristics are: 5% commissions, monthly reporting requirements, basic property management duties generally associated to the day-to-day handling of utilities, trash outs, lawn maintenance, etc), 5-day cancellation notice, 3 month initial period, among others. As you would expect, the legal department of lenders and servicers design the language in these contracts to be significantly more seller-friendly than a normal agreement.

Once the broker receives the listing agreement with the initial list price, Terra Asset Management expects to receive the signed listing agreement within 24 hrs; along with a copy of the listing sheet showing the property active on the market in Loopnet, CoStar, MLS, etc.

Marketing Channels

Small Commercial assets are generally required to be available in the main market or information exchange platforms such as Loopnet, Costar and if applicable, even on the local MLS. Many brokers are promoting their listings through additional, non-conventional media channels such as social networking sites like Facebook, MySpace, LinkedIn and even Twitter. Industry articles keep talking about the RE 2.0 marketing avenues and the use of online communities to network or promote your listings as a very effective way to have a deeper exposure.

Monthly Reports

After the listing has been on the market for 30 days the Monthly Status Report must be prepared and submitted. It is very important because the asset manager relies on the information provided to consider changes to the marketing strategy. These monthly reports should be fully completed with plentiful information and must generally be accompanied by the current marketing materials (listing printout, flyer, etc- as well as a fresh picture of the property showing your "For Sale" sign). This may not seem as important at first but it is a good indicator for the asset manager of what the property looks like for the month ­landscaping, snow removal, paint/graffiti, etc.

The report is typically done every 30 days from the date of listing, regardless of when you actually submit it. Some agents will deliver after the due date and then count 30 days from then. The best agents will have an automated reminder that notifies the coming due date of the report, will thoroughly complete it and send it on or before the due date. The asset manager must keep the property file updated with a MSR with activity for every month on the date of listing. The activity report should include an update on the market, any comparable sales, new listings, etc. For occupied property, it is important to bundle the property management account statement, updated rent roll and maybe even the requests for reimbursements all together in this package. As part of the activity reported, you must specify the number of inquiries - phone or web-, number of showings and number of offers for that month. If no offers or no showings after a number of inquiries, brokers should communicate any recommendations for adjusting the marketing strategy.

 List Price Reductions

The most common change in marketing strategy requested by listing brokers is a reduction in list price. The most common frequency for an opportunity to adjust the list price is every 60 days on average. Some lenders may allow for more or less frequency depending on the property conditions, market trends and willingness to sell.

In order to process a reduction in list price, Asset Managers requires the three most recent monthly reports with all attachments and any evidence of new market data. It is very important that there are no items such as pictures, attachments, etc. missing from the reports. Remember that you are providing the asset manager with the necessary ammunition to make a case in front of the management committee for reducing the asking price of the asset.

Upon approval of the list price reduction, you will receive an amendment to the listing contract adjusting the price and generally, the expiration date of the agreement. This is typically where the listing extensions occur. A big part of the decision to extend or reassign the listing is the timely and proper completion of reports in addition to presenting many offers.

Offers

Activity breeds results. If you are exposing the property to the market, you are promoting your listing, generating inquiries and showings, the offers will start to come in. It is very important that you document each offer and immediately present them to your asset manager. It doesn't matter whether the offer is not so good, asset managers understand that bottom feeders may bid for the asset. However, be sure to express your opinion on the quality of the offer to make sure the asset manager understands your rationale. By immediately presenting the offer, the asset manager will be able to prepare a counter offer to be sent to the buyer. The process may go through more than one counter negotiation before all terms are agreed upon. Most small commercial asset managers will want to review the terms of the offer in a summarized version instead of the entire. It is also very convenient for communicating terms of counter offers until all terms are agreed and the final documentation is drafted. The most common components of an offer summary are: Buyer's Name, Offer amount, Earnest Money Deposit (EMD), Type of offer (Cash, Conv.), Evidence (proof of funds, mortgage commitment), Due Diligence requirements, Exact Closing Date, and any Contingencies (“As-is", inspections, environmental reports, etc.)

Qualify the Buyer - It is very important to qualify the buyer in the negotiation process to avoid reaching an agreement, the asset manager obtaining approval on the offer and then have the buyer walk. To qualify the buyer, the asset manager will require proof of funds for the down payment (if financing) or the full purchase price. For financing, a pre-approval letter from the lender is required. Typically a commitment is expected within 14-­21 days from effective date of the contract, after which the contingency is released and the deposit is non-refundable. All financing details need to be filed with the broker at that time.

Timeframes for Approval - The timeframe for obtaining offer approval is generally within 5 to seven days. Depending on the amount of loss, there may be additional layers of management that need to approve the offer before asset manager can execute the sales contract. This is a part of the process that is beyond the control of your Asset Management Company. The mood and appetite for accepting offers may vary from month to month or quarter to quarter depending on the internal accounting and overall direction adopted by the management directors. Therefore, it is important to manage the buyers expectations in terms of the response and final acceptance of their offer. Buyer­ imposed deadlines and offer acceptance timeframes generally will not apply to REO purchase contracts.

The Deal – Offer Accepted

At this point, all appropriate parties have approved the deal. The process to set up a smooth closing now begins. Because of the willingness and frequency of closings, the lender is prepared to move very fast towards the agreed closing date. Remember also that your asset manager and his department may be counting for the closed transaction in their loss and goal projections for the current month. It is very important to make absolutely all efforts to close as stipulated in the sales contract. The agent plays a key role in this process as being proactive will make a huge difference in meeting the deadlines.

Offer Approval - Upon approval, the asset manager will provide the title/escrow company contact information. In most cases the lender selects the agency that will handle the closing because they may have a relationship. This company may already have advanced the title work, may only need to update it and can deliver a faster closing. The earnest money deposit is to be held in the lender­-selected escrow company. You will generally be responsible for distributing the executed documents to all parties.

Seller Addendum - In addition to the contract, the lender will often require a seller addendum to accompany the purchase contract. Similar to the list agreement, this is a document that supplements the terms presented in the customary sales contract and incorporates additional disclosures and stipulations pertinent to the transfer of ownership of them REO asset. This document is also drafted in a language that is very seller-friendly and the majority of the terms are non-negotiable. It is designed to override any discrepancies in terms and essentially establishes the terms for the REO transaction. The most important aspects contained in this addendum refer to the disclosure of property conditions stating an As-Is purchase where the seller provides no guarantees of any kind. It also stipulates penalties and fees for extensions beyond the closing date as well as specific inspection periods allowed, etc. There will generally not be any changes allowed to this document.

Earnest Money Deposit - Must be placed in escrow immediately upon executing the agreement or within the timeframe stipulated after the effective date. The broker must confirm receipt and notify the asset manager.

Release Contingencies and Enforce Timelines - Typical contingencies include inspection periods and mortgage commitments. For either case, the broker must be constantly attempting to have the buyer complete inspections and obtain a removal of contingencies. The minute these are released, the deposit is non-refundable.

Broker’s Role Through Closing - The broker is the person in the best position to expedite all aspects of the transaction. Coordinating and expediting timeframes and strategies in going non-contingent and to make sure the deal closes as expected. Some of the most valuable brokers are those who go out of their way to assist closers in obtaining information, documents, checks, etc., in order to make sure the deal closes. Many times, the broker is the asset manager’s main source of information for the deal.

Deal Closed! - Upon receiving confirmation of closing, the agent will to follow-up on and make sure that the seller receives the funds on the date stipulated in the contract. In some states like CA, the closing occurs and then it must be recorded before the funds are released. It is very important to make sure the lender receives the wired funds as expected.

Terra Asset Management would like to thank the Commercial REO Brokers Association (CREOBA) for their cooperation and permission in using information from their courses.