Things Buyer Should Know When Purchasing an REO
(Foreclosed) Property
EXECUTIVE SUMMARY:
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 these differences to
make a good decision. It will require a patient and
informed Buyer to have a transaction close
successfully.
Definitions: REO or Foreclosed Properties:
When the property is not sold in the auction at the
court step, as described in the article
foreclosure Process,
it goes back to the lender, and if that lender is a
mortgage company/bank it becomes known as
REO
(Real
Estate
Owned
- by the bank) property. Based on some historical
data and observations, only about 3%-5% of all
scheduled auctioned properties are sold to the
audiences at the court step of the Counties (e.g.,
in Collin County of Texas). This means, more than
95% of those properties go back to their respective
lenders or banks.
Please note that this article explains differences
between an REO Foreclosure (after the bank
repossesses the property) and a regular non-REO
buying Process.
For Foreclosure buying Process at
the court steps in Texas, please visit
http://www.TexasFiveStarRealty.com/Foreclosure_Conduct_of_Sale_in_Texas.asp
For the
most up-to-date list of REOs foreclosure in North
Texas please visit
http://www.texasfivestarrealty.com/List_of_Foreclosures.asp
DETAILS OF THE DIFFERENCES WHEN PURCHASING AN REO
PROPERTY AND PURCHASING A REGULAR (NON-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 contract (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.
·
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.
For more
information on Foreclosure Process and purchasing
foreclosed (REO) property, please visit
http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp
For a
current list of foreclosed (REO) properties in North
Texas, please visit
http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp
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