Top ten tips for REO buyers – important facts
Sunday, October 24th, 2010
For Sale
These days everyone is looking for a great deal. We probably have all seen on the television, “This mansion sold in 2004 for 8.25 million and just one month ago sold for a 2.25 million.” Maybe not that great of a deal but seeing stories like this leads us to believe that we should all be taking advantage of the next “deal.” Well maybe and maybe not.
The market I follow which is Anna Maria Island and the surrounding areas are a bit different. Sure, Anna Maria Island Real Estate has our fair share of bank owned properties better known as REO which stands for Real Estate Owned. But, it is a much different story on our tiny little island. Where most of the nation sees more than 25% of its for sale inventory being REO, we on the island range between 5% – 9%. For a risk tolerant buyer that wants to live on Anna Maria Island the reward can absolutely outweigh the risk and especially if you have performed a renovation yourself in the past. Below are my top ten list of things to know for REO buyers. Of course this does not cover all the risks and this should merely be used as an aid and I always, always suggest using a local attorney to help through the shark infested waters.
#10) Hire a local real estate professional. Don’t use aunt Ruth who has a full time job but dabbles in real estate on the weekends in another area of the state. You need to use someone that is burning through alot of transactions every year and has a vast array of resources that will be suggested. Who is a good attorney, building inspector, mold inspector, banker and there are many more. You want a REALTOR that works through alot of transactions. This is best because you want a diverse array of support personnel and the more transactions the more the sales person has seen who does a good job and who does not. In an REO transaction it is more critical than ever to use someone with experience in this side of real estate. Sure, I understand why this step may not seem transparent but just give me a few more minutes and you will see why it is here. If you need help finding a good real estate professional check out my blog, top 8 key’s to real estate success.
REO for sale
#9) Hire a good local attorney. Use your real estate professional for guidance if need be. They know who is handling bank owned properties and who will do a good job. If your real estate professional cannot give you a few to call then I suggest you find a new real estate professional. You need a good real estate attorney to help with the title search. Most banks make no guarantee of title. To put it as plainly as I can, do you want someone 3 years after owning your REO home to come knocking at your door telling you owe them $35,000 for the roof they put on 4 years ago? Worst yet, banks make no claim that the title is “marketable.” This basically means that you might not be able to sell your home due to a cloud on the title. Do you think it is important later some day to sell your home?
#8) No prorations after closing. In most cases this is not a huge issue but it is important to understand this especially in the case of new construction. When property values start to go up then be sure to ask your professional sales person what this could mean in the way of your pocket book.
#7) Most banks can back out of the contract for whatever reason they want. Could be because it is a blue sky. So keep this in mind as you spend thousands of dollars on mold inspections, building inspections and maybe a survey or elevation certificate. It is not uncommon to spend $3 – $5,000 prior to closing. Realize, regardless of how much you
Real estate treasure
spend to prepare yourself to buy the property, the bank can back out anytime and for any reason and you have no claim on the funds spent to prepare for closing. No refund of money. Why – cause that is what is in the contract! In addition, do you think as a buyer they let you back out for any reason? No way! Most banks will allow you a period to inspect the property. Some REO contracts have no contingency period and if that is the case proceed very very carefully and I suggest consulting your attorney. Consider your deposit up for risk. Why? If you put $20,000 down as an escrow deposit and you find the home is ready to fall down and is now worth $200,000 less,with no contingency to back out which would you rather lose? $20,000 escrow or $200,000.
#6) Banks will almost never disclose anything regarding the property. This means as a buyer you are walking around in the dark and have absolutely no idea about any pre-existing conditions. Most banks will allow you a period to inspect the property after the contract for sale is signed. If the contract has no contingency for an inspection consult your attorney and be very very careful prior to signing the contract. Consider your deposit up for risk. Why? If you put $20,000 down as an escrow deposit and you find the home is ready to fall down and is now worth $200,000 less than it is worth with no contingency to back out which would you rather lose? $20,000 escrow or $200,000. By the way, most banks have a clause in their contract that says they can grab your deposit immediately even if there is a dispute.
#5) Undisclosed tenants. This is a doozie. If there are trespassers or squatters in posession of the property it will be your responsibility to evict using an attorney. This takes money and time, all of which is a limited resource. In addition, most contracts state that if there are any security deposits or last month’s rent on hand that will be the REO buyers responsibility. This all equates to hiring the right building inspector to review the property does not have any evidence of squatters, etc.
#4) Cannot sue the Bank. This is one of the toughest that will should require strong re-consideration. Sure you can sue anyone but most contracts require the buyer to reimburse the lender for any costs they incur due to the suit and most require a penalty if the buyer violates the covenant not to sue.
REO Value
#3) Avoid addenda that states the buyer will take title of all liens, easements, encroachments, assessments and eliminate all obligations of the REO lender to remedy any of these issues. If you have not already hired legal counsel to help and you see this in the contract for sale do yourself a favor and PRIOR to signing the contract get legal counsel to help. You will need a contingency time for someone that you have hired to be sure none of these pre-existing conditions exist. If there is a lien on the property from the local government due to uncut grass or garbage in the yard of $150,000 and language is in the contract as stated above then you as the buyer will be required to remedy the situation. Feel like paying an extra $150,000 for your property. This happens every day and we have seen higher fines than this on Anna Maria Island!
#2) Read the contract. This may seem obvious but I cannot tell you how many times I have heard buyers state I will sign the contract now and read it later. Also I have heard – I am sure my real estate professional will warn me about the highlights and low lights – NO, this is your money, your investment. Each bank uses a different contact and to read through most sale for contract paperwork, it takes a good 1 hour. So, read the contract before you sign and if you have any questions consult your attorney.
#1) Did I mention to get help? The REO lender will not adjust their contract for sale. This means that you should have a contingency period for inspection of the building, title and any other concerns. You need good legal counsel to search for title defects, assessments, easements, you name it. Could you try an REO buy without a good local real estate professional, probably. Without a local sales professional your escrow deposit is at risk. Without an attorney’s assistance there is no question that your entire equity position in the real estate transaction is at risk. I personally would not want to lose either however it is the buyer’s tolerant to risk that will dictate how to proceed.
If you have any questions don’t hesitate to email me or call – (941) 345-1288. If you are in the Bradenton, Sarasota, Longboat Key or Anna Maria Island area looking for a great investment I would love the opportunity to help. Please note, I am not an attorney and this list is not meant to be all encompassing and only a guide and REO tricks of the trade change often.
