Courtesy of Graystone Realty, LLC – graystonerealty.com
By Lynn Stone, Broker
A property that is taken back by the mortgage company, bank, or investor after an unsuccessful foreclosure auction is known as Real Estate Owned (REO.) Purchasing an REO is different from making offers to an owner/seller.
- Mortgage companies, banks, and investors have their own protocols for selling their REO properties. Generally, they offer their properties at competitive prices because they desire quick sales. However, they want to get the best price possible based on research done by local Realtors through Broker Price Opinions (BPO.)
- Because the prices are competitive, there may be several buyers making offers on these REO properties and bidding wars may ensue. When more than one offer is submitted, the bank will usually send out notices that there are multiple offers and that each bidder should respond with their “highest and best” offer by a deadline. The bidding is then closed and the bank studies the offers, considering both price and terms. It may be that the highest offer contains many contingencies (home/radon inspection, financing contingency, etc.) that make it less attractive to the bank. In that event, a lower offer with better terms may be chosen. While contingencies are for the protection of the buyer, you do not want to include frivolous terms as contingencies in a competition of this sort; you want to make your offer as “clean” as possible, while protecting yourself with necessary contingencies regarding condition of the property and financing. Keep in mind that banks will not accept offers contingent upon the sale or settlement of another property. Also, banks do not allow pre-settlement occupancy or decorator’s agreements. Banks may also charge a per diem (up to $150) for delayed settlements, if the cause for the delay is on the buyer’s side.
- REO properties are sold in “AS IS” condition without any warranties. Most banks will not make repairs. You are advised to have a home inspection for informational purposes. If structural or mechanical (electrical/plumbing/HVAC) deficiencies are found, you may ask the seller to make repairs. Some banks have conceded when asked. Or, sometimes your “clean” contract may have removed the home inspection contingency or never included it initially. In that case, discuss the options with your Realtor, as you may want to have an inspection before an offer is submitted.
- Once an offer is accepted, the bank will provide a standard clause addendum for you to sign. No changes may be made by the buyer, so please read this form carefully before signing it, as it cannot be amended.
- Generally, it takes several days to obtain a verbal counter or acceptance from the bank. If accepted, the contract is considered ratified. The escrow deposit, usually made payable to the selling agent’s firm, may have to be made payable to the listing broker or to the settlement agent in certified funds. Some banks require that the escrow deposit be forwarded to the bank/seller after buyer’s financing contingency is removed from the Contract of Purchase. There may be other addenda required by the bank as the transaction progresses; any forms submitted to the bank usually must be in original format, not copied.
- Normally, an REO transaction may take thirty to forty-five days; however, if circumstances occur regarding the deed of foreclosure or other title issues, it may take longer.
- Communication throughout this part of the transaction may not be easy, as the agent representing the seller may not have direct contact with the bank/seller. Answers to your questions could take several days to be communicated back to you. Patience is required.
- The bank/seller’s addendum will dictate that the buyer use the settlement agent employed by the bank/seller for all their foreclosures. Money-saving advantages such as lender’s title insurance and other benefits may be offered. The Real Estate Settlement Protection Act (RESPA) states that buyers have the right to choose their own settlement company if they so desire.
- Once settlement occurs and the HUD statement is signed, the buyer may still not be able to take possession of the property. Sometimes it takes 24-48 hours for the bank/seller to complete settlement and all documents, title, and deed are recorded. (Court houses are not open on weekends/holidays.) Therefore, you should not depend on a set settlement date or make definite moving arrangements until you know when recordation will occur. When giving notice to a landlord, please arrange for extra time; you cannot move into the REO property until the bank/seller releases the keys. Some bank/sellers are more lenient in this regard than others.
Although the purchase of an REO property is attractive to a buyer, the buyer who is armed with the knowledge of how to proceed is more likely to be successful in closing a transaction. Consult with your buyer’s agent regarding the offer itself and listen to your agents recommendations as the transaction progresses. Do not hesitate to ask questions, and remember to be patient; the result will be a pleasurable transaction that all parties feel good about.