Real estate owned (REO) services: property management fees, disposal and letting commissions, success fees on unit sales

Once financiers repossess properties, a financing support company may manage, let, refurbish and sell them unit by unit for the owner; each activity has its own fee pattern (monthly management fees, commissions on completed sales or lettings, volume or price bonuses), and some involve third-party brokers or contractors, so the company must separate its performance obligations, decide when each fee is earned, judge whether it is principal or agent for subcontracted work, and keep sale proceeds collected for the owner out of revenue.

Which distinct services does the mandate promise: ongoing property management, marketing and sale of units, letting, refurbishment oversight? Is the disposal commission earned on signing, on transfer of title, or on receipt of proceeds, and can it be clawed back if a sale fails? Are bonuses linked to volumes, prices or deadlines, and how far from the target is the portfolio at the reporting date? When external brokers or contractors are used, does the company control the service before it is provided to the owner, bear responsibility for it and set its price?

1. Identify the performance obligations, typically: property management (a series of distinct monthly services satisfied over time), disposal services for each unit, letting services, and any refurbishment oversight.
2. Recognise property management fees over time as each month of service is provided.
3. Recognise disposal and letting commissions when the related obligation is satisfied, usually when the sale completes or the lease is signed as defined in the mandate; treat commissions that can be clawed back if a sale is reversed as variable consideration.
4. Treat volume, price or deadline bonuses as variable consideration and include them only when it is highly probable that a significant reversal will not occur, often only when the target is achieved.
5. For subcontracted brokers, contractors or marketing, assess whether the company is principal (controls the specified service before transfer, primarily responsible, pricing discretion) and presents revenue gross with the cost as cost of services, or agent and presents only its net margin.
6. Account for sale proceeds and rents collected for the owner as client money, not revenue.

Measure management fees at the contractual amount for each period, such as a fee per unit per month or a percentage of rents collected. Measure commissions at the contractual rate applied to the completed sale price or agreed rent. Measure bonuses at the constrained estimate. Where the company acts as principal for subcontracted services, revenue is the gross amount billed to the owner; where it acts as agent, revenue is the net amount retained.

Disclose: (1) the types of real estate services provided and the timing of recognition for each; (2) disaggregation of revenue between management fees, commissions and bonuses; (3) judgements on principal or agent conclusions for subcontracted services; (4) the treatment of proceeds and rents collected on behalf of owners and any related restricted balances; (5) the constraint applied to bonuses not yet recognised.

• Recognising disposal commissions when a reservation or deposit is received rather than when the sale completes
• accruing a volume bonus pro rata to units sold before the target is reached
• presenting sale proceeds collected for the owner as revenue or deferred revenue
• presenting the gross value of subcontracted works as revenue when the company merely arranges them for the owner
• deducting broker costs from revenue when the company is principal for the disposal service.