How real estate agents get paid from foreclosures depends upon several factors explained below.
Real Estate Foreclosure Process Summary
But first, a brief description of the foreclosure process.
Foreclosure auctions initiated by either the lender or trustee begins with an opening bid of the remaining unpaid loan balance plus fees. These auctions are open to the public.
On average, foreclosure auctions winning bids total around 15% below the property’s actual value.
Beware, most foreclosures do not allow inspections or viewing inside the property. In addition, real estate agents do not become directly involved with the auction as no offers or written purchase contracts occur.
However, as you read below, fees and commissions exist for real estate agents during and after the foreclosure process.
Properties not sold at the auctions become “Real Estate Owned” (REO) by the bank (or other lenders). With REO properties, the bank or lender takes responsibility to evict any residents (or squatters), maintenance, repairs, and securing the property.
REO Listing Agent
Banks and other lenders hire real estate brokers to sell their REO properties. The listing agent views the property and reports its condition to the lender. The listing agent then determines a competitive listing price.
REO’s listed with the local MLS attracts other agents. Like any other listed property, the listing agent promotes the listing, coordinates viewings, and accepts purchase offers. The listing agent represents the lender during the closing.
REO Buyer’s Agents
In an REO, the lender pays the buyer agent’s commission upon closing. Like typical listings, the listing agent splits the total commission 50/50 with the buyer’s agent.
Besides foreclosures, some sellers use an auction to sell their houses faster. This requires reducing the opening bid price to around 75% to 80% of the market value. Unless the seller personally conducts the auction, a professional “auction house” company auctions off the house.
Properties sold by an auction house pays the buyer’s real estate agent a small commission (usually 1%). The winning bidder generally pays 5% on top of the bid to cover the auction house fees. Contact the auction house to find about real estate commissions as they vary between companies.
How to Earn Commissions Helping Buyers with Foreclosures and REO’s
Some real estate agents earn commissions helping buyers with foreclosures and REO’s. Many use a real property auction site like Auction.com to help clients find good deals. Another source includes REO and “bank owned” foreclosure listings at Realtor.com.
In addition, these sites also include real estate auctions:
Foreclosures: A buyer’s agent gets the buyer to sign an agreement paying the agent a commission based on a percentage of the winning bid amount. Or, a flat fee based on the services performed before the auction.
REO’s: The buyer’s agent splits the commission with the listing agent.
You can also earn another commission after the auction or REO purchase. When your client either flips and sells the property or rents it out further commissions await you.
Buyer’s Agents Fees with Foreclosures
Besides commissions, many buyer’s agents charge a fee to conduct preliminary research on homes a buyer shows interest. These fees vary depending on the amount of time to drive by, inspect, and conduct a CMA ranging from $500 to $1,000.
For instance, a buyer’s agent needs to research the length of vacancy time to see if it endured freezing and thawing seasons unattended. Furthermore, could heavy rains cause significant structural damages?
Also, a title search could show liens the bank never cleared up which they are not required to do. For example, an IRS lien on the property which won’t go away after the foreclosure. Similarly, unpaid property taxes also stay with the property after foreclosure.
Otherwise, the buyer takes a big risk called “caveat emptor” (buyer beware). That’s because the buyer pays for the house with cash with no formal preview or inspections. In addition, banks sell foreclosed homes “as is” meaning the bank won’t fix any problems.
Paying a buyer’s agent to conduct some preliminary research before the auction reduces the risk.
The Ethics of Buyer’s Agents and Auctions
Bear in mind, the ethics for Realtors involved in auctions include referral fees and cooperative agents commissions:
Agent/Broker Refers Clients to Auction Company
Receiving a referral fee for sending clients to an auction company requires the following responsibilities:
- Helping the seller to analyze his or her needs, the property, and the market determines whether a good auction situation exists.
- Referring the seller to a professional real estate auction company.
- If a sale listing agreement exists between the agent/broker and the seller, cancel the listing agreement and replace it with an auction contract.
- Sending a notice to the MLS that the property is subject to a public auction.
- Collecting the referral fee from the auction company (not the seller) when the property closes.
Being a Cooperative Agent/Broker in an Auction
The cooperating sales agent/broker may be a:
- Buyer’s agent;
- Subagent; or
- Dual Agent.
The cooperating agent/broker registers the buyer for the auction and earns a commission from the auction company. The agent/broker accompanies the bidder to required pre-auction events and the auction while registering the buyer as a bidder. The auction company pays the agent/broker a commission.
Responsibilities of a Cooperating Agent/Broker
Prior to the Auction:
- Contact auction companies for inclusion on their contacts list.
- Attending auctions to learn their procedures.
- Advertising as an agent/broker knowledgeable about auctions.
- Attending pre-auction events and previewing properties with the client.
- Helping clients with determining the market value before the auction. This includes checking comparable, title, liens, property debts, and market conditions. Reading the bidders packet.
- Learning the rules for earning a commission after registering a successful bidder.
- Learning the terms of the auction.
- Registering the bidder before the auction as the auction company requires.
- Assisting the bidder with an auction strategy.
During the Auction:
- Attending the auction with clients.
- Helping them register.
- Assisting clients with bidding strategies.
- Accompanying successful bidders to the contract room.
- Collecting commission check when successful bid property closes (normally from escrow or title company).
How Real Estate Agents Get Paid From Foreclosures Conclusion
How real estate agents get paid from foreclosures includes several revenue sources.
Foreclosures provide buyers (bidders) agents with the ability to collect fees for researching properties. Prior to the auction, the buyer’s agent researches title, liens, does an outside property inspection and prepares a CMA for a fee. When the winning bidder eventually sells or rents the property, the agent collects commissions.
REO properties involve a listing agent who shares the commission paid by the lender 50/50 with the buyer’s agent.
Auction companies pay small commissions to the winning bidder’s agent. They also pay a referral fee to agents sending them sellers to auction their properties.
NAR provides ethics guidelines for Realtors involved with auctions. NAR’s guidelines cover Realtor’s responsibilities when:
- Referring clients to an auction company; and
- Acting as a Cooperative agent/broker in an auction.
Remember, these ethical responsibilities include pre-auction, during the auction, and after the auction.
As you read, you get fees and commissions with foreclosures and auctions.
Keep 100% of your fees and commissions by joining a 100% commission brokerage. Just like our over 900 current agents.
Steven Rich, MBA – Guest Blogger
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