Ready for an REO? Some are not!
Friday, November 28, 2008 at 07:46PM Buyers love REOs for the low prices. After they have realized that banks are in the driver's seat and they have to offer almost the asking price, they are exhilerated to have their offer accepted. But this new happiness is fleeting, for they are about to find out that once again, the bank is in the driver's seat.
Most REOs are not in the best of shape. They usually need some repair. Remember, the prior owner lived there for up to a year, mortgage-free, knowing he would lose the house. Maybe he trashed the house, but at best, he just let things go. However, I have seen some gorgeous well maintained REOs, where the list of repairs would take a handyman only a couple hours. That was one lucky buyer (P, are you out there?)
When you buy an REO, things move very quickly. In a usual sale, you have 17 days to remove contingencies for appraisal, loan, inspections, etc. With an REO, you have 5 days, sometimes 7 days, so you have to hustle. They also fine you if you don't have your loan docs ready within 21 (or 30) days.
In some ways, a bank is more flexible in doing the contracts, but in other ways they are sticklers. This affects the agents more than the client.
After verbal acceptance, the bank will send to the buyer 20 - 30 pages of documents to sign, and each one must be signed or there is no deal. A valid contract exists only after the asset manager signs off, and that is done only when the buyer has signed all 20 - 30 pages, submitted a pre-approval letter with FICO score, proof of funds (bank statement showing you have the downpayment), and a cashier's check for the deposit.
If you don't like the rights you are agreeing to or signing away, in a usual sale you can counter that out. But not so with a bank. They have a corporate system to follow. If you don't like any of the pages and don't sign, or ask for an exception, forget it, they'll kiss you good-bye.
The subject of this post is the 20 - 30 pages that you are asked to sign. Some of this language takes away your rights that you thought you had in the purchase agreement for termite inspection, final walk through, request for repairs, etc. You are told that the bank will only give you the 1 key to the house, good luck if you can find the mailbox key or garage door opener in the house. It's probably gone.
The bank might take away your entire righs for seller payments under paragraph 4 of the purchase agreement, where you decide which party pays for closing costs and termite. Chase simply deletes them in one paragraph of their counter offer. They do not pay their share of escrow and title, which can be $1K easily. Don't like it? Then don't buy. Someone else will.
You sign that you accept the house "as is", so you do not get to ask for any repairs. If the house needs repairs, you either pay for them yourself, or you have to walk away within the inspection period (first 5 or 7 days, not 17 days, as in regular contracts) days. If you walk away after the inspection period, you lose your deposit.
The bank is exempt from providing disclosures of various sorts, and they don't have to pay for compliance with water heater and smoke detector installation. If the house needs it, you pay.
Chase states they are subject to liquidated damages and arbitration, regardless of whether you initialed that in the purchase agreement. That means, the greatest loss to the buyer for breaching the contract, is the loss of deposit. Wells Fargo takes away your right to both, even if you initialed it.
There is a reason these houses are cheap. Still, you do get a good bargain, but please know ahead of time that this is not for the faint of heart, and you won't be coddled by a seller who tries to keep you happy in escrow. You are just another person in the asset manager's case file, not a special person to a seller who is anxious to close the deal on his home and bends over backward to do repairs and negotiate with you.
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Reader Comments (4)
I love foreclosure properties. Once you agree on a price, there are NO NEGOTIATIONS. The roof leaks? I expect it. The toilets are clogged? Count on it. The pool needs re~plastering? Bet on it. And the buyer pays for it all (almost every single time). You can't come to the bank and ask them to do anything except maintain the property in the condition it's in on the date of acceptance. Personally, I find this sort of deal refreshing: the moment I decide to buy a foreclosure, I DECIDE TO TAKE IT EVEN IF IT IS FALLING DOWN AND I NEED TO REBUILD IT FROM THE GROUND UP. But this type of sale takes a particular type of buyer, and I don't buy unless all my hard work, time and trouble is assuaged by purchasing the house at BARGAIN PRICE. There are fewer qualified buyers with funds necessary to purchase bargain foreclosures than there are properties available. If the reverse were true, there would be no foreclosures and errant home~owners could sell their houses themselves and avert their own financial disasters. Never forget that as a buyer, you are in the power seat. Banks are not landlords and they need to move their foreclosures OFF THEIR BOOKS. Foreclosures that linger help to bring other houses into foreclosures, as prospective buyers will walk past non~distressed sales as not being worth their time or money.
IF A FORECLOSED HOUSE IS NOT A BARGAIN~~~WALK AWAY. A foreclosure MUST be a bargain or else you should let some other person take it. Anyone buying ANY house AS IS needs to demand that the price be cheaper than any other existing house on the market~~~if it's not, it should sit on the market and idle there until the bank is slapped upside~the~head for not pricing it to SELL. There are lots and lots of foreclosures that are OVERPRICED. Don't let FORECLOSURE lure you into a false sense of economy~~~sellers want you to believe that by slapping 'FORECLOSURE' on a piece of real~estate that it is a bargain. Make sure you are paying PRE~BUBBLE prices for any real~estate. The market is no longer like 2005, 2006, 2007, or even early 2008~~~it is more like 2004 and it will be falling back even further than that. PRE~BUBBLE PRICES! THAT IS WHAT YOU AS A BUYER SHOULD DEMAND.
That is a good description of REO sales. However, I have seen on many occaisions banks make repairs asked for by a FHA and VA appraiser. Banks will take FHA and VA offers, they are closing every day. Just look at many recently sold bank owned properties in the title records, you'll notice many have loans for 97% of the purchase price, that is an FHA loan. But they do prefer conventional offers. I've also seen banks extend closing dates for very long periods if the buyer is having problems with their loan.
There is a mistaken perception by REO brokers towards FHA based on 10 years ago thinking. FHA is really little different than conventional these days in terms of difficult closing.
Also the competition you are talking about for bank-owneds in San Diego IMO is more the SFR market (especially the <$500k SFR market - I can't comment on the >$500k SFR market, as I don't know that market). I think buyers have a lot more control with banks selling condo's. Most condo's are not nearly as competitve, so buyers can dictate the terms more. Banks are probably pretty desparate to unload condo's.
Clarissa, thanks for the follow up. Been looking at foreclosure's most of this year and havn't made a bid since all that were available were overpriced and not worth the work and worry. I don't understand how folks can buy a REO and put in the real dollars necessary to make it liveable and find themselves with a house that is worth more that the other homes in the neighborhood.
Any way glad to read that someone else feels similiar to me, was beginning to doubt my sanity as the market just hasn't made any sense to me.
Thanks for all the comments. Clarissa, I was wondering the same as Ron - by the time you've put in the money to make the REO look like the nice home next door, how much have you really saved?
Yes, I did make an error in saying the banks don't fix anything. They *say* they don't fix anything, that is what I meant. However, they will fix health and safety related items. If you find something in an inspection, like mold, now the listing agent has knowledge and has to disclose it. No longer can they say "we have no knowledge of the property condition". I would think, the bank then has to fix the mold. I've heard of banks fixing heaters, etc. They don't want to be sued.
Condos are a big problem - if the complex is not at least 50% owner occupied, then it's almost impossible to get a loan, even if you put 60% down! That's because historically, low owner-occupancy rates are associated with complexes going downhill. As more people stop paying their HOA dues, the money is not there to make repairs. Elevators stop working and don't get fixed. Landscaping is left to go to weeds. Etc, Stay far away from any complex even approaching the 50% limit!
Thanks for all the comments!