Getting the deal of a lifetime on a foreclosed home or condominium could be the answer to your prayers. However, sometimes the process is fraught with difficulties…if you try to go it alone. There are problems aplenty when buying a foreclosure and an experienced real estate agent will be very inexpensive insurance policy against making a huge and costly real estate blunder. What we’ll be dealing with here is the process of buying bank owned or foreclosed properties, the ‘how-tos’ with an emphasis on what to avoid and ultimately who should be part of your team.
Foreclosure Sales vs. REOs
Before getting into the process, we’ll need to cover some basics. The bank will typically and initially offer the home as a “foreclosure sale” in an auction. The sale assumes that the mortgage is still in place. In a foreclosure sale the price is set at a minimum to include the following: the loan balance, any accrued interest, plus any other associated costs. The successful bidder must have a cashier’s check in his possession at the time of the auction. In today’s market, this type of sale almost never occurs. If there was enough equity in the property to cover the mortgage and the market was more stable, the owner could have potentially sold his property himself and avoid the obvious negatives associated with this transaction. Nowadays, this scenario is probably unlikely
If the bank resells the property in a REO (Real Estate Owned) sale, as the alternative, the mortgage then ceases to exist and the bank owns the property 100%. This article will consider only the process from an REO perspective which would also include Veteran Administration mortgages, as well. VA mortgage repossessions are handled by real estate agents in much the same way that REOs through a commercial bank are handled.
Basic Buyer Preparations in Purchasing a REO
In all cases, REO repossession is not free of potential issues. In fact, there are often more problems. Obviously, a bank or the VA that is saddled with an inventory of repossessed homes actively tries to get the asset off of their books. However, they certainly strive to not lose additional monies on the transaction. After all, they probably have already lost a significant amount in the repossession process. In many cases there are issues that will need to be addressed upfront with respect to the ultimate contract that will be signed, assuming that your purchase bid is accepted.
Whether you are buying a home in this manner to personally occupy it or it is purchased as an investment, it will require you to perform additional ‘due diligence’ in order to avoid some of the potential ‘got-chas’ that are not usually associated with straight real estate purchases. Therefore, the two most important people to help guide you through the procedure will be an experienced real estate realtor and a seasoned real estate attorney. Additionally, you’ll need to fully understand the process and the potential problems that can befall you.
Physical Problems with Repossession
Many homes that are repossessed have reached this situation because of family problems, loss of employment, death, etc. In the end, if a short sale or standard foreclosure sale is not possible, as is the case in the current market, the home sold under a REO repossession often is vacant for a period of time and the following problems are often encountered:
1. Vandalism and Break-ins. When a home is left vacant for any period of time, often appliances or anything of value may be stolen or vandalized.
2. Deliberate Vandalism by Previous Owner. When a homeowner is forced out, there is a tendency for those to take out and sell any of the appliances and in many cases, vandalize and destroy the home in retaliation against the mortgage holder for the repossession. However, to prevent the situation from occurring, some mortgage companies are now making a cash payout to the homeowner to prevent that situation from occurring.
3. Wild Life. If a home is left vacant and the lawn and foliage are unattended, various animals may seize this as an opportunity to move in. This might include raccoon, opossum, snakes, rats, mice, etc. After all, nature abhors a vacuum.
4. Maintenance not Performed. Many homeowners under the threat of foreclosure, neglect maintenance because funds are scarce and basic survival may not include painting or other cosmetic improvements. Often important preventive maintenance is not performed, as well.
5. Mold Damage. A home that is sitting vacant for any period of time, particularly in places like Florida or other locales in warm, humid climates are prone to develop mold. If left without proper air conditioning or dehumidification, the walls may develop this fungus and mold, particularly if the home has had water or plumbing leaks. Some mold damage may even occur on the inside of dry wall. Once mold takes hold on a wall, often the only recourse is to replace the entire dry wall.
6. Lead paint. Normally this is not much of a problem in newer homes, but in older homes, it is likely that lead based paints have been used in the interior. If this is the case, it’s a safety hazard for a homeowner, his family or even workmen brought in to perform repairs. There are two approaches, cover it completely with paneling or use any one of a number of products designed to bond with the lead paint. In any event, removal or surface repair of lead paint on the interior of a REO home will certainly add cost to the potentials purchase
Professional Home Inspection
Most homebuyers may not be aware of the potential problems attendant in the purchase of a REO home. Therefore, it is almost mandatory that a homebuyer use the services of a reputable, licensed home inspector. Further, use an inspector that has previous experience inspecting REO homes. Money invested at the front end of this transaction, will save both headaches and dollars after the home has been purchased.
Certainly, when and if any of these problems are discovered, they can be used to negotiate allowances in the price of the property. There are however, potential buyers of such properties that look for homes in need of repair. For the most part, they are savvy and well experienced in this type of transaction. For the average homeowner, it’s always best to avoid homes that appear to be problematic, upfront.
REO Contractual Issues
After dealing with and allowing for problems with respect to the condition of a property, the next hurtle is working with the bank that now owns the property. When you buy a REO, you start with a standard contract. The bank then attaches a normally non-negotiable “bank addendum” to the standard contract. There is a major ‘got-cha’ in this: a bank owned contract addendum means, “Everything in the main contract is nullified”, if the addendum addresses it. For instance, if the main contract allows you make a final walk through inspection, but the addendum says “As-is,” the addendum wins. While addendums typically specify no negotiation, in home purchases as in life, there is always room for negotiation.
The following are a couple of issues that you may need to be aware of:
1. Some standard addendums may be written nationwide and actually ignore local laws. Local statutes supersede these contracts, therefore in some cases, there are points in addendums that are not enforceable. A local attorney can guide you in this.
2. Beware of hidden fees. Sometimes, significant fees, amounting to thousands of dollars may be shifted from the seller to the buyer, as directed in the provisions of a contract addendum.
3. Most addendums typically allow the bank to cancel the contract up to the sale date and sometimes with no penalty to the bank. For instance, if the bank receives a higher offer, they may have the right to break the contract.
4. Be wary of termite provisions. Normally it’s the seller’s responsibility to pay if there is termite damage. The addendum typically shifts the risk back to the buyer.
5. If the bank is trying to unload a REO property, normally they will not provide financing. However, it never hurts to ask.
6. Always have a title search performed. You would expect that in a bank REO sale this would have been covered, however you can never really be sure. Therefore, make sure that the title is 100% clear through a proper title search. You can perform a preliminary check of title on RealtyTrac.com and then hire a title company to run a full, insured title search before closing on a deal.
A VA REO has some Real Advantages
While most of the homes that are now for sale as REOs are available from banks, VA repossessed homes and to an extent, FHA repossessed homes offer certain benefits to a homeowner over and above conventional banks. They are sold the same way through a local realtor and you as a potential buyer can place a bid on a property. If your bid is highest, you have the right to purchase the home. A VA home REO sale has the following advantages:
• The VA may provide financing (VA Vendee Financing) available to both veterans and non-veterans, alike.
• Under most circumstances, the property can be purchased with no down payment, whether the buyer is a veteran or not.
• The VA pays all closing costs, which may amount to as much as 6% of the purchase price.
• Private Mortgage Insurance (PMI) is not required.
• Instant equity may be developed, as VA property discounts may be as high as 50%.
• There are no mortgage prepayment penalties
Whenever you ultimately submit an offer, if you have found any defects, justify your offer with both photos and inspection reports. No matter what type of REO property and from whom you buy it, you will need to:
1. Work with a good realtor, experienced in this type of transaction.
2. Make sure that you secure the services of a real estate attorney, prior to any payments being made or documents being signed.
3. Use a qualified home inspector.
Certainly, by taking precautions and by assuming the worst about the condition of a property, you can avoid overpaying for a home and underestimating the amount and number of repairs and amount of renovation that will have to be undertaken on your purchase.