Friday, November 21, 2008

REO’s: A Cautionary on Bank Own Property Purchases

Properties that have been repossessed through foreclosure by a lender are called REO’s. REO stands for Real Estate Owned. If they are bank owned, why not call them BO’s? I suppose it is obvious why not, although many of them stink. When buying REO properties there are some key differences to understand, as opposed to a traditional real estate purchase. First and foremost, you as a buyer have little or no ability to negotiate the price or terms with the seller. REO properties are sold “AS IS” and the seller is a financial institution with no emotional attachment to the property for sale. Unlike a traditional homeowner, they do not have any personal interest in who is moving into “their home”. There is a good chance that no one from the bank has seen the property, or been inside the house. The same holds true for the listing broker if that listing broker is not local. The lender is only concerned with receiving the highest Offer and best terms possible to suit themselves. Most of the negotiation process is completed via internet e-mail. The only information the bank will receive is the terms of the Offer. They only care about how much you will pay for the property, and how you will pay for the property.

Be sure you speak with your lender before submitting an offer on an REO property. In most cases, a pre-approval letter, not a pre-qualification letter, is required simultaneously with the Offer to Purchase. The bank wants to be certain they are considering an Offer from a buyer that has the credit and financial wherewithal to see the deal through. In many cases the seller even wants to see a bank statement showing you have enough cash in your account to consummate the transaction. Isn’t that an invasion of privacy?

Since you can’t rely on personal interaction with the seller, the cleaner the Offer the better it will look. Because REO properties are sold in “As-Is” condition, you want to look for a loan program that applies to this type of property. The condition of the property may not qualify you for certain types of traditional loans. If the property is in poor condition, and most REO’s are in poor condition, you might want to investigate a construction loan. Many lenders are now offering programs geared specifically for distressed properties. This way, the repairs can be completed after the buyer takes possession of the property. If your Offer is accepted, you are entitled to have your own property Structural Inspection, but you will only have a few days to complete the inspection. Quite often, only a dry inspection will be possible. By that I mean the power and water will not be turned on. Some REO clearing houses will advance funds and take responsibility for ‘trashing out’ the property and generally cleaning it up, because it helps them market the property. However, that is being done less and less today because listing companies are finding it very difficult to get reimbursed for their expenses. It’s getting ugly, and it may get worse before it gets better.

What about the closing date? Yes, that is also handled differently from the way a traditional purchase is closed. In a traditional sale, it is possible for the seller to be flexible about a closing date. Some contracts use the term “on or about” a certain date. Sellers in a traditional sale tend to be more willing to adjust plus or minus to make the sale work, as long as the Closing takes place within a reasonable number of days from the original date agreed upon. However, REO contracts use the term “on or before” a certain date, and the bank will tell you what the closing date will be. The bank will expect the Closing to take place no later than their stipulated closing date, and if there is a delay on the buyer’s side causing the buyer to be in default, the bank will either terminate the contract, with the buyer forfeiting their down payment, or the buyer will be penalized a specified dollar amount per day for an extension. Most often that amount is $100.00 per day. However, because of the enormous inventory of bank owned properties today, in my experience sales often do not close on time and the bank is responsible for the delay. A 30-day closing can end up being a 120-day closing, and that could mean the buyer will lose their loan rate lock. Nevertheless, I cannot stress strongly enough that the bank sets the timelines and they could care less about what you want.

Because REO transactions are different from traditional purchases, any buyer interested in an REO property needs a knowledgeable support team consisting of a competent and vigilant real estate buyer agent who knows how to look out for their buyer client’s best interest and can interface fluidly with a good attorney. Yes, the next member of the team needs to be a GOOD ATTORNEY, one who will take the necessary care to investigate the property title. What you do not need is a wishy-washy, don’t ask, don’t tell real estate agent and attorney, who just wants to get it done, collect a fee and move on.

REO properties appear to be very attractive opportunities on the surface, and you can save money purchasing an REO property. However, you can also end up spending considerably more money than you would on a traditional purchase property, not to mention all the stress and anxiety that has become typical with this type of transaction. Many times the offering price is set low in order to attract buyer attention with the hope that multiple buyers bidding on the same property will drive up the final price. Buyers are encouraged to submit their highest and best offer without the opportunity to know what the highest price is that they are bidding against. Since these properties are being sold “AS IS”, and since the onus is usually on the buyer to correct any structural deficiencies in the property, repairs can drive the final price above the realm of what would be considered a good deal. With short sales, foreclosures, and REO’s there are no guarantees, and in Massachusetts, it’s Caveat Emptor. That is why you need to hire an Exclusive Buyer Agent who deals with buyers’ needs day in and day out. On Martha’s Vineyard you want SplitRock Real Estate, an exclusive buyer agency specializing in careful buyer representation.