A Basic Primer for Buying a Foreclosure (REO) Property
Posted 08-22-2011 at 04:08 PM by Sunshine Rules
Foreclosures can be great deals for buyers as they are typically priced under the current market. However, not every foreclosure property will be a good deal. So how do you tell the difference between a great deal and a not so good one? Knowledge is a key factor in making wise choices when it comes to REOs.
So what exactly is an REO?
An REO, or “Real Estate Owned” property is one in which a lender or bank has taken title and is now re-selling post-foreclosure. The REO property is usually one of thousands in a bank’s asset portfolio, and the typically overburdened asset manager’s chief objective is to get the property off the bank’s books as quickly and cheaply as possible without subjecting the bank to lingering liability for the asset.
If the listing is relatively new to the market, it is likely that the bank will not deviate much from its asking price. You will have greater negotiating ability on REOs that have been on the market 30 days or longer.
When banks price REO foreclosures substantially under the current market, multiple offers are usually the response. This means you could be up against stiff competition to purchase that particular bank-owned home.
How are REOs different from a “regular” sale?
Buying a foreclosed property is different in many ways from a “regular“ transaction.
The REO seller does not have any emotional ties to the property, it’s all about the asset manager meeting his required monthly goals. The seller is looking for the highest net to them with as few buyer contingencies as possible.
All offers must be in writing. The banks usually offer the properties “as is with right to inspect.” The bank usually specifies what type of contract should be used (usually the FAR-BAR form) and either supplies special bank required addendums up front or after an offer has been tentatively accepted. The terms of the bank special addendums are non negotiable - you as buyer can accept them or walk away from the deal.
If your office is contingent on financing, the bank will want your offer accompanied by a pre-APPROVAL letter (not pre-qualified). Some banks require buyers getting financing to get pre-qualified through a specific lender. However, you are under no obligation to use that particular lender for your mortgage.
If you are paying cash, the bank will want your cash offer accompanied by proof of sufficient funds to close. There are usually specific guidelines regarding the proof of funds, so be sure your agent goes over them carefully with you.
The banks often give specific instructions in the MLS as to when they are accepting offers. Sometimes the listing must be active in the MLS for 5 or 10 days before offers will be reviewed. Sometimes the first 10 or 15 days are open only to offers from buyers looking to owner occupy the properties - investors must wait. Once the timeline for offers has been met, the bank will typically take 3 to 5 business days to review all offers.
If the bank selects your offer, your agent will be notified and the bank will generate their special addendums for you to accept and sign. As I stated previously in this article, you may not change or counteroffer any of the terms on the special addendums - the terms are take it or leave it.
It is to your benefit to have a real estate attorney of your choice that is familiar with REOs review the terms of the bank addendums with you so that you clearly understand the terms the bank is adding to the contract as the special bank addendum(s) is for the most part a complete re-write of the initial offer and contains many practical and legal issues that should be reviewed by you, the buyer, with your legal counsel. Legal issues such as insurable vs marketable title and adding limitations of liability for the seller. Many times the banks will offer to pay for buyer’s title policy in order to have the right to select a closing agent of their choice. By law, you have the right to elect to pay for your own title policy and thereby select your own closing agent who will represent you and not the seller (bank).
At this point the bank has not yet signed your offer and will not do so until you have signed and returned ALL of the addendums and disclosures the bank requires to be signed by you. Until the bank representative signs the contract and addendums and returns a copy to you (through your agent), you do not have a binding agreement. The property will remain active in the MLS and the bank may still consider other offers as they come in. It may take the bank up to 10 business days after you have submitted the contract and paperwork for their representative to actually sign and thereby execute the contract. The bank’s protocol will determine whether they actually entertain subsequent offers.
Frequently the bank generated addendum issues include:
Altering dates for closing, mortgage contingencies and/or inspection periods.
Changing financial provisions.
Modifying the seller warranties and limiting the seller’s liability.
Defining what closing costs the bank will and will not pay.
Imposing monetary penalties for buyer’s failure to close by contract date.
Adding disclaimers for mold, condition or other environmental issues.
If you are requesting any concessions by the seller towards your buyer’s closing costs, pre-paids or repairs, these must be requested in your written offer.
If you are planning to obtain either a FHA or VA mortgage, you must make sure the property will meet the required standards for this type of financing before writing your offer as banks typically will not make repairs or allow repairs to be made prior to closing.
Once you have a fully executed contract, you should pay strict attention to deadlines for contingencies within the contract. This includes any home, roof, pest, mold or other inspections you wish to have completed on the property.
Should the inspections uncover repair or condition issues that you find unacceptable under the terms of the contract, you must give written notice to the seller within the guidelines, along with a signed cancellation & release form.
Some banks include in their special addendums terms that make the buyer responsible for paying a per diem (per day) fee if the transaction fails to close on the specified day, no matter who is responsible for the delay.
For the reasons given above, it’s important that you carefully review all paperwork and disclosures regarding your offer on an REO property.
Writing a successful offer on a REO
If you're wondering how you can make your REO offer shine above all the rest and be the winning offer, here are a few tips to help you select the right price and terms:
(1) When making your offer, consider the market value of the home, not just the list price. Have your agent provide you with several comparables to the REO property that have sold in that neighborhood within the past 3 months. Try to use only homes that most closely match the REO property in age, square footage, number of bedrooms and bathroom, amenities and condition.
(2) Make sure you have your pre-approval or proof of funds ready to submit with your offer. Have your agent review the guidelines set by the REO to make sure your documents comply with those guidelines.
(3) Make your offer “as is” with right to inspect. Banks typically state up front when this is a requirement of all offer. Give yourself adequate time to have your inspections completed, but do not ask for a lengthy inspection period that the bank may reject.
Sometimes buyers are not allowed to inspect the house before making an offer. The problem with buying a house sight unseen is you can't calculate what repairs may be necessary to baring the property up to livable condition. Make sure you understand what terms the bank is offering regarding home inspections before you write an offer.
(4) Ask for a reasonable closing date, usually within 30 to 45 days. Sometimes banks prefer a quicker closing date if you are paying by cash. Have your agent discuss terms with the listing agent if possible.
(5) Banks do not like buyer contingencies, so the less you include in your offer, the better.
We’re ready to close, so everything’s ok now, right?
Wrong! Seller-selected closing agents often want to “insure over” known survey or title defects, leaving the buyer in a position of having to file a claim on the title policy in the future with no assurance as to the resolution of the matter. In other words, the problem is not resolved, it is only pushed “down the road.”
Most seller-selected closing agents use notaries from outside of the area who provide no legal representation, cannot explain the closing documents and whose sole responsibility is to get the closing documents signed and returned to the closing agent. It is not unusual for the closing documents to include releases of liability protecting the closing agent for matters which are the responsibility of the closing agent that may have been overlooked or neglected.
You may also need someone to follow up to obtain the title insurance policy and recorded Deed after closing as these closing agents make this a low priority.
For these reasons, it’s important to have your own legal representation review all title work, review all closing documentation and follow up after closing to make sure you receive your title insurance policy and recorded deed -- especially if your contract allowed the seller to select the closing agent.
Learning the ins and outs of buying foreclosure properties before you jump on the bandwagon will help you stay clear of the many pitfalls and guide you towards a successful purchase.
So what exactly is an REO?
An REO, or “Real Estate Owned” property is one in which a lender or bank has taken title and is now re-selling post-foreclosure. The REO property is usually one of thousands in a bank’s asset portfolio, and the typically overburdened asset manager’s chief objective is to get the property off the bank’s books as quickly and cheaply as possible without subjecting the bank to lingering liability for the asset.
If the listing is relatively new to the market, it is likely that the bank will not deviate much from its asking price. You will have greater negotiating ability on REOs that have been on the market 30 days or longer.
When banks price REO foreclosures substantially under the current market, multiple offers are usually the response. This means you could be up against stiff competition to purchase that particular bank-owned home.
How are REOs different from a “regular” sale?
Buying a foreclosed property is different in many ways from a “regular“ transaction.
The REO seller does not have any emotional ties to the property, it’s all about the asset manager meeting his required monthly goals. The seller is looking for the highest net to them with as few buyer contingencies as possible.
All offers must be in writing. The banks usually offer the properties “as is with right to inspect.” The bank usually specifies what type of contract should be used (usually the FAR-BAR form) and either supplies special bank required addendums up front or after an offer has been tentatively accepted. The terms of the bank special addendums are non negotiable - you as buyer can accept them or walk away from the deal.
If your office is contingent on financing, the bank will want your offer accompanied by a pre-APPROVAL letter (not pre-qualified). Some banks require buyers getting financing to get pre-qualified through a specific lender. However, you are under no obligation to use that particular lender for your mortgage.
If you are paying cash, the bank will want your cash offer accompanied by proof of sufficient funds to close. There are usually specific guidelines regarding the proof of funds, so be sure your agent goes over them carefully with you.
The banks often give specific instructions in the MLS as to when they are accepting offers. Sometimes the listing must be active in the MLS for 5 or 10 days before offers will be reviewed. Sometimes the first 10 or 15 days are open only to offers from buyers looking to owner occupy the properties - investors must wait. Once the timeline for offers has been met, the bank will typically take 3 to 5 business days to review all offers.
If the bank selects your offer, your agent will be notified and the bank will generate their special addendums for you to accept and sign. As I stated previously in this article, you may not change or counteroffer any of the terms on the special addendums - the terms are take it or leave it.
It is to your benefit to have a real estate attorney of your choice that is familiar with REOs review the terms of the bank addendums with you so that you clearly understand the terms the bank is adding to the contract as the special bank addendum(s) is for the most part a complete re-write of the initial offer and contains many practical and legal issues that should be reviewed by you, the buyer, with your legal counsel. Legal issues such as insurable vs marketable title and adding limitations of liability for the seller. Many times the banks will offer to pay for buyer’s title policy in order to have the right to select a closing agent of their choice. By law, you have the right to elect to pay for your own title policy and thereby select your own closing agent who will represent you and not the seller (bank).
At this point the bank has not yet signed your offer and will not do so until you have signed and returned ALL of the addendums and disclosures the bank requires to be signed by you. Until the bank representative signs the contract and addendums and returns a copy to you (through your agent), you do not have a binding agreement. The property will remain active in the MLS and the bank may still consider other offers as they come in. It may take the bank up to 10 business days after you have submitted the contract and paperwork for their representative to actually sign and thereby execute the contract. The bank’s protocol will determine whether they actually entertain subsequent offers.
Frequently the bank generated addendum issues include:
Altering dates for closing, mortgage contingencies and/or inspection periods.
Changing financial provisions.
Modifying the seller warranties and limiting the seller’s liability.
Defining what closing costs the bank will and will not pay.
Imposing monetary penalties for buyer’s failure to close by contract date.
Adding disclaimers for mold, condition or other environmental issues.
If you are requesting any concessions by the seller towards your buyer’s closing costs, pre-paids or repairs, these must be requested in your written offer.
If you are planning to obtain either a FHA or VA mortgage, you must make sure the property will meet the required standards for this type of financing before writing your offer as banks typically will not make repairs or allow repairs to be made prior to closing.
Once you have a fully executed contract, you should pay strict attention to deadlines for contingencies within the contract. This includes any home, roof, pest, mold or other inspections you wish to have completed on the property.
Should the inspections uncover repair or condition issues that you find unacceptable under the terms of the contract, you must give written notice to the seller within the guidelines, along with a signed cancellation & release form.
Some banks include in their special addendums terms that make the buyer responsible for paying a per diem (per day) fee if the transaction fails to close on the specified day, no matter who is responsible for the delay.
For the reasons given above, it’s important that you carefully review all paperwork and disclosures regarding your offer on an REO property.
Writing a successful offer on a REO
If you're wondering how you can make your REO offer shine above all the rest and be the winning offer, here are a few tips to help you select the right price and terms:
(1) When making your offer, consider the market value of the home, not just the list price. Have your agent provide you with several comparables to the REO property that have sold in that neighborhood within the past 3 months. Try to use only homes that most closely match the REO property in age, square footage, number of bedrooms and bathroom, amenities and condition.
(2) Make sure you have your pre-approval or proof of funds ready to submit with your offer. Have your agent review the guidelines set by the REO to make sure your documents comply with those guidelines.
(3) Make your offer “as is” with right to inspect. Banks typically state up front when this is a requirement of all offer. Give yourself adequate time to have your inspections completed, but do not ask for a lengthy inspection period that the bank may reject.
Sometimes buyers are not allowed to inspect the house before making an offer. The problem with buying a house sight unseen is you can't calculate what repairs may be necessary to baring the property up to livable condition. Make sure you understand what terms the bank is offering regarding home inspections before you write an offer.
(4) Ask for a reasonable closing date, usually within 30 to 45 days. Sometimes banks prefer a quicker closing date if you are paying by cash. Have your agent discuss terms with the listing agent if possible.
(5) Banks do not like buyer contingencies, so the less you include in your offer, the better.
We’re ready to close, so everything’s ok now, right?
Wrong! Seller-selected closing agents often want to “insure over” known survey or title defects, leaving the buyer in a position of having to file a claim on the title policy in the future with no assurance as to the resolution of the matter. In other words, the problem is not resolved, it is only pushed “down the road.”
Most seller-selected closing agents use notaries from outside of the area who provide no legal representation, cannot explain the closing documents and whose sole responsibility is to get the closing documents signed and returned to the closing agent. It is not unusual for the closing documents to include releases of liability protecting the closing agent for matters which are the responsibility of the closing agent that may have been overlooked or neglected.
You may also need someone to follow up to obtain the title insurance policy and recorded Deed after closing as these closing agents make this a low priority.
For these reasons, it’s important to have your own legal representation review all title work, review all closing documentation and follow up after closing to make sure you receive your title insurance policy and recorded deed -- especially if your contract allowed the seller to select the closing agent.
Learning the ins and outs of buying foreclosure properties before you jump on the bandwagon will help you stay clear of the many pitfalls and guide you towards a successful purchase.
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