15 Issues to Consider When Buying Bank Owned (REO) Property

Although acquiring REO properties can in some instances offer excellent opportunities, anyone considering purchasing REO property needs to understand that it is not at all like purchasing other forms of property.  Some issues/differences that you should consider are the following:

1. The standard contract that you submit will generally be modified by a lengthy addendum (sometimes up to 15 pages long) that changes almost all of the key contract terms, in most cases to drastically benefit the lender. An REO contract affords the Buyer very little, if any legal or contractual protections.

2. Generally, the Lenders (i.e., the Seller) response times with respect to offers, questions, modifications, or any issue that arises can be lengthy.  Be prepared to be patient, and do not assume proposed changes to the deal will come about easily, if at all.

3. The contract generally permits the Lender to cancel the contract at any time prior to closing.  People can get tripped up by this. In fact, the Lender will generally reserve the right to continue marketing the property while under contract. Few Lender contracts are safe until you close.

4. The property will be purchased as-is.  No repairs will be performed by the Lender nor will credits be given to the Buyer.  In other words, if you discover a problem, you generally have to accept the problem.

5. The Lender will provide few, if any disclosures, and of course there will be no customary disclosures.

6. You will have a more limited inspection window (generally 7-10 days). Be prepared to act quickly once the contract has been accepted and the effective date has been established.

7. Unlike in regular transactions, in most REO transactions, special assessments, municipal assessments, and liens can be the responsibility of the Buyer.

8. On some occasions, the Lender may not even agree to pay customary tax pro-rations, even if the contract provides for it.

9. The Lender will generally agree to pay for title and closing expenses, but will likely choose its own out of town (or even out of state) title/closing agent.  For anyone who has been involved in REO transactions, these lender selected title agents can be very poor at communication, can be very poor at satisfying the contract’s timeframes, can struggle to draft certain documents properly, rarely take the proper steps to insure that the person signing the documents on behalf of the lender has proper authority, and in some worst case scenarios, have little regard for verifying that good title is being conveyed to the buyer.  Remember, they represent the Lender. In fact, the title agency handling the closing on behalf of the Lender may have an affiliation with the Lender.  And beware, they will almost always try to slap the buyer for closing or other fees that are completely inconsistent with the contract, and can sometimes be very significant.

10. The Lender will generally reserve the right to unilaterally extend the closing date for any or no reason.

11. Although the Lender can in essence close when it likes, if you do not close on time, there are typically severe financial penalties.

12. The Lender can generally choose the physical location of the closing, which can often times be several counties away.

13. In REO transactions, the Buyer will be required to waive all of its remedies against the Lender if the Lender breaches the contract, other than the recovery of the buyer’s deposit, this is hardly an adequate remedy.

14. In an REO transaction, there is the possibility that the foreclosure was not handled properly, therefore creating unknown defects in title that may not be discovered for years.

15. The Lender will agree to provide insurable title, but not marketable title.  There is a huge difference. Most title is insurable, but marketable title is title that can readily be sold down the road. Insurable title simply means that someone was willing to issue a title policy, but that policy could be filled with so many exceptions that it is essentially meaningless.

Given the complexity and heightened risk associated with an REO transaction, we strongly suggest engaging a real estate attorney early on in the process (i.e., before submitting an offer) to protect any buyer’s interests.  In fact, a good real estate attorney will likely save your client more money than what they charge.


Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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