Things Buyer Should Know Purchasing REO Foreclosed Property
Disclaimer: Not all items specified here should negatively impact your decision to purchase an REO property nor applicable for all banks. Each foreclosure sale is different and requires a lot of details to be handled when buying a foreclosed (REO) property. Consult with your real estate agent and/or your real estate attorney for questions regarding purchasing a foreclosed property.
DIFFERENCES:
In most parts, purchasing a foreclosed (REO) property and the process of offering, counter-offering and negotiations will be somehow different than regular (non-foreclosed) sales. There are many lender’s specific rules and requirements that require purchaser to follow.
Please note that following is a summary list of differences that I have collected during my years of experiences in real estate and I believe the REO purchasers must be aware of them. This list should be used as an educational and for informational purposes only and may not be complete.
For example; Banks may require:
1. Pre-approval or pre-qualification letter from a specific lender,
Most REO companies will not accept a contract without proof of Lender pre-approval. Most require purchaser to obtain pre-approval letter with their own bank. I have seen some banks requiring working with Lenders out of town or out of state, this causes longer time to process and resolve any issue (if any) than the local lenders.
Some purchasers feel more comfortable working with their own lenders and might have already been working with their own favorite lender and got pre-approval or pre-qualifying letters. Though, banks may be not required to get the loan from a particular lender, but just requiring it to get pre-approved letter from specific lender causes more work, takes more time and possibly hit the purchase’s credit score.
2. To use Bank's preferred Title company,
Again similarly as described in item above, this may cause some inconveniences for the purchaser. I have seen some banks requiring working with title companies out of town or state that looses the personal touch and takes possibly longer time to process and resolve any issue (if any).
3. To use bank's own forms and addendums in addition to or replacement of the standard forms.
The Sellers REO addendums, which is always in their favor, will supersede the contract where inconsistent. Some addendums are made public prior to Buyers signing the sales contract, while other addendums are only offered after the initial offer is submitted.
4. Property Tax Proration.
If you are buying a foreclosed property from prior year, make sure to ask the bank to put a statement … indicating the property tax will be prorated and adjusted based on the date of purchase. Otherwise, the addendum will say Taxes will not be prorated and cost more to the Buyer.
5. Prior Year’s Exemptions.
If you are buying a foreclosed property from prior calendar year, there can be no exemptions on the property in a subsequent year, regardless of what tax district is showing. Failure to watch this closely may cause your Buyers to be shorted in their proration at closing.
6. No Seller Disclosure Notice is required.
Therefore, the Buyer doesn’t have access to the previous history of the things that had happened to the house. Even though there might be not major physical or material facts in the past (e.g., fire, flood, underground plumbing issues, etc), but there could be some other events that some people are sensitive to it and could affect their purchasing decision.
For example, in some cultures, the purchaser might not be interested in purchasing a house that somebody was murdered in it, or even if somebody had died with natural causes in recent months. Though, these are not required by law to be disclosed, but the purchaser might ask directly from Seller’s agent or Seller in a regular sale and get his/her answer, but he/she would not know it in REO foreclosed sale.
7. Property is usually sold "AS IS" Condition,
Property is usually sold in its present "AS IS" Condition with no or little repairs or warranties, unless is a safety or hazardous issues or something that causes property not to be approved for the loan. If you expect your home to be completely nice, clean, move-in ready, a foreclosure property may not be for you.
8. No Warranty, If Repairs done by Bank:
When repairs are negotiated and agreed to be completed by Sellers, the repairs are made only to the Seller's satisfaction only. Sellers may not provide receipts and details or work repairs. Sellers also do not warrant or provide any guarantee for work performed.
9. Additional expenses to Buyer due to fixing and repairing.
If you decide to fix, repair, replace some of those problems that bank will not fix, make sure you get some estimates from some reliable contractors to get an idea how much it cost you to bring the house in a shape that you like and move-in ready.
Also, if you have plan to monitor the contractors work and progress, make sure to adjust the estimate to take account of your time for finding and working with good contractors and monitoring and inspecting their work (e.g., estimate cost * 1.5).
10. Loss of Time and Money During the time to make the house move-in ready.
Depending on the condition of the house at the time of purchase and the condition of the house that you want to be at move-in, it may takes several weeks or months before the house is move-in ready. This is a loss of time and money, due to the fact that you may not be able to use the house while you are paying the mortgage payment.
11. Bank usually takes longer time than regular sale to respond.
They usually hold an offer for several days or even weeks to receive more offers (multi-offer situation) before making decision. If you expect quick response (e.g., within one or two days), a foreclosure property may not be for you.
12. Multi-Offer Situation,
As explained above, most REO transactions end up with multi-offer situation. Dealing with multi-offer situation by itself is a disadvantage that limits your power to negotiate better.
13. To submit offers online through their websites,
Although, I don’t see any problem with this, but it just shows something different than regular sale, where you may send the offer via Fax, email, etc.
14. No Option Period and No Unrestricted Rights,
In a "regular" sale, home Buyers can exercise their unrestricted rights to terminate a contract during the "Option" period with any or no reason. However, in a "foreclosure" sale, there is technically no option period on an REO property, therefore the bank does not give Buyers the unrestricted right to terminate.
15. Utilities may not be turned on.
Some banks may have the utilities turned on for the viewing and/or inspection purposes and some may not turn them on all. If the utilities have not been turned on for the foreclosed property for viewing, you may need to schedule viewing during the day and the time with a lot of natural lights (e.g., day time, Sunny day, etc).
16. Inspection Periods and Limitations
In a "foreclosure" sale, Inspections at the expense of the Buyers are recommended and Buyers usually get 7 days to complete the inspection and repair negotiations thereof.
If the utilities will not be turned on for your inspection and the bank allows you to turn it on in your name (usually for a small window such as maximum 3 days), you must pay for the costs of turning them on and deposits associated in setting up the account. There could still be risks associated with turning on utilities under your name while you are not living there.
17. Non-Negotiable exact pre-defined amount for earnest money.
Banks usually require an exact pre-defined amount or exact percentage of the purchase price for earnest money (e.g., exactly 1% of the purchase or Offer Price). Although, I don’t see any problem with this, but it just shows something different than regular sale, where the earnest money can be negotiated and even for some investors a contract is written with no earnest money.
18. Owner Occupancy Certificate may be required.
Many of the banks require Owner Occupancy or at least give the first choice for Buyers intending to live in the foreclosed property for at least one year.
19. Special Warranty Deed Instead of General Warranty Deed
General Warranty Deed: A general warranty deed is a type of deed where the grantor (Seller) guarantees that he or she holds clear title to a piece of real estate and has a right to sell it to you. The guarantee is not limited to the time the grantor owned the property-it extends back to the property's origins.
Special Warranty Deed: The special warranty deed is not nearly as protective of the Buyer as
is the general warranty deed.
The grantor of a special warranty deed conveys the property with two warranties:
The grantor warrants that they have received title.
the grantor warrants, unless noted specifically in the deed, that the property was not encumbered during their period of ownership.
The grantor of the special warranty deed, in effect, only warrants the title against their own actions or omissions. They warrant nothing prior to their taking title. If specifically stated in the deed, other warranties can be conveyed. Special warranty deeds are frequently used by executors and trustees.
For more information on Special Deed Warranty and General Deed Warranty and their differences, please visit http://www.texasfivestarrealty.com/General_Warranty_Deed_vs_Special_Warranty_Deed.asp
20. Limited Seller Closing Cost Contributions
Some closing costs, which are allowed to be paid by regular Sellers, will be disallowed to be paid by REO (banks) Sellers and become Buyer’s responsibility in REO sales, even if they are in original sales contract as Seller’s responsibility. This means the Buyer may end up with slightly higher closing cost at closing.
21. Waivers of Buyers Rights
Buyers have to sign waivers of all kinds to not exercise their rights to file or take action against Seller (bank) for any reason. For example, if Seller that had accepted Buyer’s offer changes his mind, Buyer cannot suit Seller for not selling the property.
22. Seller's Sole Discretion
"Seller's Sole Discretion" term is used all over the addendums contract. These addendums that supersede the sales contract in any discrepancy is written in the language to protect the Seller. Hence, the Buyer takes on more responsibility on due diligence in obtaining the information he/she needs to complete the purchase of the property from a bank.
23. Non-Timely Negotiations Responses Back from Bank
You should not and cannot count on hearing back in a timely manner from such Sellers. After you submit an offer, or counter-offer, you may hear back in a day, it might take up to 45 days, or you may not hear from them at all. They will contact you only if they want to pursue the contract further. However, your replies back to the Seller should be quick and firm. These are not typical real estate negotiations and if you are looking to close and move-in quickly, foreclosure properties may not be for you. 24. Non-Guaranty Acceptance of Contract or Counter-Offer
In a regular sale, if you have a (i.e., both Sellers and Buyers agreed and signed) or you have agreed with Seller’s counter-offer and responded, and the Seller changes his mind to sell the house to you, you could file suit against Seller for Specific-performance of not selling house to you. However, in an REO (foreclosed) sale, the Buyer waives his right and doesn’t have that option anymore.
In this case, where Seller defaults in the performance of the contract, Seller’s sole liability to Buyer will be to return Buyer’s deposit, at which time the contract shall cease and terminate and the Seller and the Buyer shall have no further obligations, liabilities or responsibilities to one another.
However, if Buyer defaults in the performance of the contract, 100% of the earnest money will go to the Seller.
25. Late Fee Charges and Choosing the Realistic Closing Date
If Buyers cannot close by the date specified and agreed on the contract, Buyers must pay a per diem late charge to the Seller. The amount is specified in the addendum. Hence, it is important to put into consideration a realistic closing date to get your loan approved and in addition, pad the days for negotiations of the contract. However, you do not want to put the closing date too far into the future because if you are in multiple offer negotiations with other Buyers, your contract may not be selected because it's too late. The bank's objectives are to sell the house as quickly as possible and for the most net money.
CONCLUSIONS:
There are many differences when purchasing an REO (foreclosed) property. Though, not all of them should negatively impact your decision, but you need to be informed and be aware of them. It will require a patient and informed Buyer to have a transaction close successfully.
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· If you expect your home to be completely nice, clean, move-in ready, a foreclosure property may not be for you.
· If you expect to move-in quickly or get quick responses (e.g., within one or two days), a foreclosure property may not be for you.
· If you expect the Seller to make major or cosmetic repairs before you move-in, a foreclosure property may not be for you.
Each foreclosure sale is different and requires a lot of details to be handled when buying a foreclosed (REO) property. Consult with your real estate agent and/or your real estate attorney for questions regarding purchasing an REO or foreclosed property.
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