Buying an REO, what should concern me

An REO (Real Estate Owned) refers to property owned by a bank through the foreclosure process. What happened is that the home went to the court house auction steps. The crier called out the bids for the property, and no one was willing to pay the bank what their opening bid was. As a result it became REO. If an investor bought the property it would be referred to as a foreclosure. The distinction is importance for financing. If it’s REO, you’ll have no problem getting a loan on it immediately after the auction. However if an investor bought the property and put it up for sale, then many banks will say you have to wait 90 days before they’ll lend on the property. Bank of America is one of the few exceptions to the rule. In today’s market most deals fall apart because of the financing, not the house, so choose the financer appropriate to the property.

Now if the bank ends up getting the property, the bank hires an asset manager who hires a real estate agent, who puts it on MLS for exposure. Though I have heard of rare instances of people being able to buy directly from the bank, they are rare occurrences, and usually because someone knows someone in the bank.

When you submit a bid to buy, your agent will use a standard California purchase agreement (RPA-CA) and indicate your key terms (price, days to close, down payment, loan contingency, appraisal contingency and inspection contingencies). Most REOs are sold "as is". That doesn't mean you won't be doing any inspections. It means you'll do them and if you discover something that'll cost a lot of money and you're bid didn't reflect that, you have two choices, 1. try to get the bank to pay for the repair (which sometimes they do, even though you signed an “as is” addendum), or 2. Walk away from the deal. I’m not a professional inspector, but what I’ve picked up over the years from past inspections, I pass on to my clients so they look at the property with an inspector’s eye, so we minimize surprises. Surprises should be for birthdays and anniversaries only.

The worst part of dealing with banks vs. a human being is that when the bank accepts your offer it’s with a 10-14 page addendum. Essentially, they don’t want to read your contract, they rewrite the basic terms into their standard contract and call it an addendum. They key difference will be how contingencies are removed, your right to sue them and penalties for not closing on time.

The bank will always rewrite the contract to have loan contingencies removed in the passive method. For example if they say you have 10 days to remove inspections contingencies, once the 10th day has passed so has your contingency. However under the active method (which is what the RPA-CA states), your contingencies are removed by your actively sending a document to the seller saying I hereby remove contingencies. As a buyer you prefer active removal which means they are removed by you in writing and until that’s done, they stay in effect.

The other key difference is they put a penalty clause, charging you $50-$100/day if you close later then what was on the contract. However if the delay was because of them, this will not apply.

As with any services provider, experience is a plus. When you are buying something as expensive as a house, why would you want to work with someone without experience.

Good luck on your hunt.
Sunil Sethi, Broker, REALTOR, MBA, CPA
UCLA, London Business School, UC Berkeley

-sunil

SMA REALTYSunil Sethi / Associate Broker, REALTOR, MBA, CPA / SMA Realty38350 Fremont Blvd. #202 / Fremont, CA 94536 Office 510 793 8600 / Mobile 510 388 2436 / Fax 510 431 9046Personal: http://www.sunilsethi.com/