REO Purchases – Buyer Beware!
“REO” stands for “real estate owned” which is how banks and other lenders categorize homes they have taken back in on either a foreclosure or a “deed in Lieu” of foreclosure. As a buyer of an REO property you should be aware of several issues that make this type of transaction different from the usual real estate purchase.
1. The lender/seller may have little or no knowledge of the property. They do not have to complete a Transfer Disclosure Statement as most sellers are required to do giving a history of the property condition. While lenders still have to disclose any conditions or defects that could affect the condition or value, those disclosures may be of little value in light of a lender’s limited knowledge of the REO property.
2. The lender may take a long time to respond to your offer and in the meantime consider other offers as they come in.
3. The lender may give you a verbal “acceptance” of your offer. Such acceptances are generally not binding, in the absence of other signed documents sufficient to “an agreement to sell”. If you are in doubt as to whether you have a binding agreement, you should consult your own real estate attorney.
4. If you start incurring expenses, such as for inspection reports or for loan applications, prior to receiving a signed purchase agreement, you may be risking the loss of that money, which may not be recoverable from the lender/seller.
5. REO lender/sellers usually will attach a lengthy Addendum to the standard purchase agreement, or may even require the use of their own contract form. These addenda and contracts have been drafted by the lender’s attorney to favor the lender/seller. I would strongly advise you to review this Addendum or contract with an attorney because as a real estate broker I am unable, nor am I qualified to give you advice on legal documents drafted by attorneys for other parties.
6. If in the transaction you receive an REO property addendum, read it thoroughly for understanding since it will affect your contractual rights. Some of the clauses may limit your legal rights in certain circumstances, or limit your recovery against the lender. Some clause may impose daily charges for delays in closing. Other clauses may require you to hold the lender/seller harmless in and release the lender/seller from certain potential liabilities. Again I would strongly recommend that you get any “legal” questions answered by your attorney.
7. Many lenders refuse to pay all or many 0of the expenses of escrow and closing that may typically be paid by sellers. Such expenses may include title insurance, escrow fees, transfer taxes, home warranty plans and costs of repairs for the property. While such items may normally be the subject of negotiation in a real estate transaction, you may encounter a lender who refuses to negotiate or to pay for these items. This should be calculated into your overall cost of purchasing the property when you make the initial offer.
8. Inspections: Most of the REO properties and contracts therefore contain as “as is” clause. Because the lender has limited knowledge of the property it is highly recommended that you have all inspections necessary for you to discover and understand any present conditions of the property. These are normally in the form of inspection contingencies if allowed by the lender of the REO property. Some lenders will allow only informational inspection. If an information inspection during escrow discloses adverse information not previously disclosed to you you I would again advise you to seek the guidance of your attorney.
9. Review the Preliminary Title Report for liens, encumbrances and assessments. Many of these will have been expunged or paid off during the foreclosure, or deed-in-lieu, process by which the lender came to own the property. It is possible certain rights of others may continue after the sale to you. You should discuss this possibility and the Preliminary Title Report with your attorney.
In conclusion there are many great buys out there for investors and home buyers looking for those “deals” but be informed when considering making an offer on an REO property!
