What Every Buyer Needs to Know before Making an Offer on a Lender-Owned Property
A Lender-Owned property (REO/Foreclosure) is a property that went into foreclosure and was not sold to an independent party at the Trustee Sale and is now owned by the Lender.
Not all foreclosures are a “great buy”. Although the potentially lower prices are attractive, each property has its own challenges in regard to condition caused by abuse, neglect or lack of maintenance. Property conditions can greatly affect the home’s long term value. Buyers must do their homework to determine whether a property is truly a “good deal”.
Please be aware of the following to help you make an informed decision:
• Every Lender is different. There are no rules. There is no way to predict how a Lender will respond to anything.
• Some REO properties are priced under market value to attract multiple offers. This means you could be up against stiff competition. Write your best offer first. Sometimes the lender will accept the best offer or ask selected buyers to resubmit what is called “Highest & Best” offer. You may need to submit offers on several different properties before an offer is accepted and you may have to pay over list price. Cash offers have more appeal to the Lender.
• The Lender may or may not agree to pay for closing costs on behalf of the Buyer. It is all about the final net to the Lender. If requesting costs be paid, may need to write over list price in order to compete with other offers.
• An experienced Real Estate Agent is essential. Prior to writing any offer, your agent will assist you in gathering the information you need to make a decision in your best interest, i.e.:
1. Status of the property – availability, number of offers, time for lender approval
2. Any Lender documents necessary to be submitted with the offer
3. Determination of market value Please know that REO Listing Agents tend to be busy and may not be readily responsive to your Agent’s request for information. Your agent will telephone, email, even text, and may not receive a response.
• Buying a REO property is not for the “faint of heart”. Patience is a must. You may wait days for a response from the Lender; you may wait days/weeks for signatures, you may wait days for a response on a request. The term “time is of the essence” bears no relevance. • Written evidence of loan Pre-Approval by your lender is mandatory. The Seller Lender may ask you to be pre-qualified by their institution; however, you would not be obligated to use that lender.
• Every Lender has a Counter Offer Addendum Addendum) that you will be asked to sign once they have verbally accepted your offer. It is essential that you read this document, line by line, as it typically alters the terms of the contract . The document will contain many disclaimers and limitations of their liability and will remove most of the standard warranties and representations in your offer.
• You will be expected to sign the Counter Offer ddendum if you accept the terms and want to proceed with the purchase. The Addendum will then be submitted to the Lender for their signature. You may wait days to weeks for the signed documents. Some Lenders may also modify the Addendum after you sign it. Reread the signed documents upon receipt. Be wary of proceeding when you do not have the signed contract.
• The effective date of the fully executed contract will be addressed in the Counter Offer Addendum. The effective date is important to meet the Inspection Period deadline, which is usually 5-10 days as stated in the Addendum.
• Some Lenders may request an increase in earnest deposit. The Addendum may state that the earnest deposit becomes non-refundable after a specific date, i.e. following inspection, etc. It is very important, if you are getting a loan, to make sure that it would be refundable if the loan was denied.
• The Lender will provide no disclosures, (SPDS, claims history, etc). Your agent may submit a Disclosure Request during the Inspection Period, which may or may not have a response. You will be provided with a blank SPDS so that you are aware of the content of information generally provided.
• The Lender will generally not be responsible for any repairs. The property will be sold As-Is. The Counter Offer Addendum contains an As-Is clause. There are instances when the Lender will agree to requests for major repairs, i.e., AC, termites, roof.
• A professional Home Inspection is highly recommended on the property during the Inspection Period. The utilities to the property may be off and the Lender may or may not turn the service on for your inspection. You may be asked to pay for them to be turned on if you want them on for the inspection. Spending the money to have them on may save you much more money in the future. The results of this inspection will assist you in making your final informed decision on the purchase of the property.
• Buying an REO property may be more expensive upfront. The Lender may require that the Buyer be responsible for certain fees at closing which a Buyer would typically not be responsible for, i.e., HOA fees, outstanding utility bills, etc.
• The Addendum may state a specific time for final loan approval documentation. Proof of funds is generally required on cash transactions.
• Close of Escrow date will be set by the Lender. The lender Addendum will specify that a per diem of $50 to $100 per day will be charged to the Buyer for each day that close of escrow is delayed. In order to close on time, documents must be at the Escrow Company 5-7 days prior to closing to allow Lender plenty of time to sign after the Buyer has signed.
• The Lender will be providing a Special Warranty Deed rather than the standard General Warranty Deed. The Special Warranty Deed does not warrant against title defect that existed before he owned the property. The Lender will most likely provide a Standard Title Insurance Policy which does not provide the same coverage as the upgraded Alta Policy. For added protection, you may want to check with the escrow officer as to the cost to upgrade the policy.
• The Lender will select a specific Title/Escrow company. Fees may vary and may be somewhat higher for the Buyer on an REO transaction. Consistent follow-up throughout the entire process by your Agent is mandatory. Patience, tenacity, a positive attitude, communication skills and knowledge of the REO process are the keys to a successful transaction.
