A Real Estate Owned (REO) property is a property held by a mortgage lender or bank due to an unsuccessful foreclosure auction. In other words, the prior owner defaulted on the loan; the lender instituted a foreclosure proceeding; the foreclosure auction resulted in no successful third-party bids; and, thus, the property reverted back to the lender (bank).
As a settlement attorney, I have been involved in hundreds of REO closings. I have been a witness to what makes for a successful REO offer and closing. I have also been a witness to the most common mistakes made when making an REO offer. Here I offer a list of DOs and DON’Ts for a buyer’s agent when making an REO offer:
1. Set expectations for yourself and your buyer
2. Make your offer successful
3. Protect your client
Set expectations for yourself and your buyer
- Remember, you are dealing with a bank. If you make an offer on a Friday afternoon, don’t expect an answer over the weekend. After all, banks are closed on the weekends. In fact, you should not expect an answer for several days.
- Most banks outsource their REO properties to asset managers. Asset managers are salaried and work 9-to-5, Monday through Friday.
- Remember the benefit of the bargain is risk and that risk will be shifted to your buyer when negotiating on REO property.
- REO listing agents often times have “Instructions for Writing an Offer.” You should obtain these instructions if available and make sure all the information is complete. Make the listing agent’s job easy.
- Don’t expect the REO listing agent to communicate until after you’ve submitted an offer.
Make your offer successful
- Include not only a pre-approval letter from your mortgage lender but also include “proof/verification of funds” that clearly demonstrate you have the minimum 10% down payment liquid (i.e., “in the bank”). Try to avoid FHA financing in your offer. You can always change your financing option later if the need arises.
- If it appears competitive, take preemptive action and write the contract “AS-IS” since the bank will almost always counter “AS-IS” anyway. I invite you to review the attached contract addendum. This addendum is representative of most addenda required by banks on REO properties.
- You can write in an inspection contingency but know that the bank will rarely agree to make repairs. Your inspection contingency will be general; meaning your only option would be to void the contract.
- Do not ask for any repairs. “AS-IS” means “AS-IS” on a REO property.
- The bank wants to see 1%-3% for the good faith deposit.
- Try to avoid asking for closing costs credits. Remember the bank is interested in net pricing.
- Email the offer to the REO listing agent and request a confirmation of receipt. The listing agent is often required to upload offers and related documents to the asset manager’s website. Make the listing agent’s job easy.
Protect your client
- Again, know the bank will strictly adhere to the “AS-IS” provision. This means that the water and utilities could be shut off and your buyer could be denied the ability to conduct a thorough inspection.
- Don’t let the REO asset manager force you to use their preferred title provider. A preferred title provider may insure over such things as unreleased trusts or other title defects in order to move the asset more expeditiously on behalf of their client (the bank).
- Write in REAL projected date of closing. Allow at least 45 days in the current market environment.
- Write in that seller will be responsible for paying ALL outstanding and delinquent condo/HOA dues; not just those allowed by law pursuant to a foreclosure sale. The bank will probably counter but sometimes they will accept it.
- Write in a home warranty to be paid by the seller. The bank will probably counter but sometimes they will agree.
- Write in 100% of all transfer/recordation taxes to be paid by seller. Again, the bank will likely counter but I have seen the seller accept these terms.
- Order title work from the settlement company as soon as your offer has been accepted. The sooner you can get a title report – the better. Many REO properties have serious title issues which can take a lot of time to clear.