I should first disclose that I am not, nor have I been in the past, an REO Broker. I have purchased them myself and I have represented buyers in the transactions many times over the years. It is as different an area of real estate from typical transactions as Podiatry is from Opthamology in medicine.These are things consumers must know before they purchase a bank-owned REO property here in my home state of New York. Most of the principles apply universally.
- You should absolutely use an attorney who is FAMILIAR and EXPERIENCED with the purchase of bank-owned properties if you buy an REO (Real Estate Owned-by the lender) in the state of New York. Even if your employer or union is providing you with subsidized or free legal representation, use of the wrong attorney can negate whatever perceived savings you are getting in the purchase, add to your stress level, and still have you poorly represented. This is, of course, to say nothing of the needless time and energy the other attorney and agents will have to expend bringing your attorney up to speed.
- You are not being rushed-you are being given deadlines for efficiency. This is why you need an experienced attorney who won't gasp or get the vapors about having to take shorter than a week to do anything. Lawyers typically operate at a casual pace in property transactions, but REO transactions have to go at a far faster pace, not because anyone is trying to bamboozle you, but because this is a NON PERFORMING ASSET and TIME IS OF THE ESSENCE. Not only that, there may be competing offers that they can go to if you or your attorney are going to dilly dally. So, a document that says "please sign and return tomorrow" really does need to be signed and faxed tomorrow.
- You are buying the house "AS IS." Nobody will dissuade you from getting an inspection, but unless there is an environmental issue, it is for your volition only. The bank will not make repairs. The bank will not put GFCI outlets near the sinks. The bank will not put new batteries in the smoke detectors. Do your inspection BEFORE you make the offer, because once you make the offer the clock is ticking with deadlines (see #1 and #2). You are already being compensated for the physical issues of the property with a lower sales price, often far more of a discount than market value less repairs.
- You cannot speak with the bank. If you run into frustration or red tape, no, you cannot speak with the bank. I know it would be great to just have your lawyer and the bank iron the issue out, but "the bank" is not "the bank" as you know it. "The bank" is an overworked, underpaid asset manager in another state who will hang up on you so fast you won't even know she answered. Why? For the same reason you'd be escorted out of surgery, a radio studio, an underwriter's office, or court. People in those places are doing their jobs and do them better without your interference. Those are not settings for the public and your interference hurts the other people who, like you, are waiting.
- You have to pay the transfer tax the seller usually pays. This raises your closing costs a bit, but the lender is losing a ton of money on this deal and needs to economize where possible. Every lender does it. It is an established practice. It is part of the cost of doing business and worth the overall discount you are getting in your sales price for this property.
- Exceptions cannot be made.If you are buying an REO in 2009 you are participating in the largest liquidation of property in the history of the planet. It is a huge undertaking that will completely break down if systems, efficiency and deadlines are subordinated to individual exceptions and personal requests. All large organizations have to operate this way or they will cease to be large organizations. Think of it this way: You have a certain cell phone plan. You can't change it on a temporary basis or get the phone company to make an exception unless you pay for another plan.
Many in the public are rightly intrigued by the prospect of buying an inexpensive, bank-owned property at a discount from the norm. That is the Rose. The thorn is that the process is far less touchy feely and far more cold and automated. However, forewarned is forearmed, and knowing these things going in will enable you to be ahead of the process and not at the mercy of new, unwelcome discoveries. You should still enjoy that purchase, but you have to understand the rules going in.
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- J. Philip Faranda, Broker-owner, J. Philip Real Estate, LLC. 2010 Vice President, Westchester-Putnam Multiple Listing Service.
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Very good post. Although it is a little lengthy, for the most part it is simplified. Good points and well written.
J Philip,
I have sold many bank foreclosures and your post is right on track. I flagged this for a feature on Activerain!
I flagged this article as well. Very well done. I agree with you on the inspection process, most of the buyers I inspect these for think the bank is going to fix items in need of repair. As an inspector, I don't hink I need to be explaining this to them , bit I do anyway. At least if they have it inspected they can get an idea of what repairs or remodels may cost. This should be required reading for anyone purchasing an REO property. Thanks.
Thanks for the post.
I wish more buyer's agents would read this before submitting an offer.
I agree. Good points all around.
In the Northern California Bay Area, ordering inspections for every REO that you bid on can add up over time.
Another strategy is to do as much visual inspection as possible and assume worst case scenario on unknown/hidden items (e.g. floor is cracked...assume must replace subfloor) when deciding on offer price. Make sure to put in a inspection contingency in the offer. Only if the bank accepts your offer do you order the inspections.
Which strategy you choose depends on the type of buyer you have - bidding aggressively or passively.
Great points and I am going to reblog it for the Agents and Buyers in my area. Also featured in the REO Realtor group
Great Post. I too wish every buyers agent would read this. I'm getting tired of some of the dumb out there. One surefire way to get your clients' offer turned down cold is to not submit a proof of funds or commitment letter and to ask for excessive due diligence or finance contingency. The finance should be limited to appraised value only. Any agent who submits without locked down finance is doing the client a disservice. Get your ducks in a row and then make an offer. The actual price can often be the most negotiable part of the deal if the stars are aligned otherwise.
Good points that cannot be mentioned to many times as the public needs to know the process and many agents writing the offers do not understand how the program works. There is no touchy feely to the transaction. It's all dollars and cents.
Excellent post. Wish there were more attorneys familiar with REO. Many of them want to make changes in the contract which slows things down and can jeopardize their client's ability to get a great deal. Some of them want to get involved in negotiations.
The best advice from attorneys is in regard to getting clear title and the type of deed (conveyance) the bank is using.
Great Post J. and your time to write it is appreciated. I would highly suggest that REO agents send a canned email with the steps of the process or attach a file with each listing agreement. When an agent is looking to present an offer all the REO agent needs to say is make sure you check the attachment on the listing or look for my email before you make your offer. This is a learning process for many of us as the market has never been full of foreclosures and short sales. Work with your fellow agent it will get things done in a nicer way.
Thank you for the information. I will start doing my inspections BEFORE the offer from now on. So many buyers think that this is the BIG deal of the century when they are looking at these listings. I try to call it like it is...as is, where is...this condition, period. If you want it, you have to play by THEIR rules. It actually makes the sale easier in ways.
I'm glad in AZ we don't have to deal with attorneys and transfer taxes...yet...it's seems that the lawyers and tax advocates are always pointing the states like NY to get 3 lawyers on every deal...
:) PS
What a great blog! Thanks for taking the time to precisely spell out the process. I don't think the buyer's agents are necessarily "dumb", but rather uninformed. Like Dawn said, it is a learning experience. I love the advice of a checklist. It is a proactive approach to simplifing an exhausting process. Thanks Dawn.
Diane Donnelly, Keller Williams Crossroads Annapolis Md
This is a continual process of informing the public and buyer agents. It's a great opportunity for the buyer as long as all are on the same page. Thanks for the post.
I'm off to send this to other agents in our office! Well said!!
J Philip-Thanks for a great post!
Dawn, your suggestions are good and that's exactly how we do it here in the California Bay Area.
Having an upfront conversation of how this will proceed is so important and I think you have outlined so many of the pitfalls that could happen along the way to buying such a property.