Recently, we encountered a transaction where a real estate investor purchased a REO property, and after closing, discovered tens of thousands in code enforcement liens against the property. The buyer was never told of the liens prior to purchase and was fully responsible to pay the liens. It turns out the liens were due to the prior homeowners placing all of the fixtures in the home and fish (yes, living fish) into the swimming pool as an act of revenge against the bank before foreclosure. The result was a health hazard that the county had to remediate, who in turn, placed a lien against the property for the costs of remediation. The purchaser wanted to sue the bank, but had no recourse, because the bank required the buyer to use its title company to close, did not provide marketable title to the property, and disclaimed all defects and liens against the property in its contract.
Real estate investors and many first time homebuyers are often attracted to REO properties, particularly because they appear to be a great deal. However, as evidenced in the story above, these transactions can prove to be very costly to those who do not act with caution. Anyone familiar with the real estate industry can see the red flags just from looking at a typical REO contract. Any potential buyer of REO property should be prepared to truly take the property “as is.” This includes taking the property with any defects, no matter how significant, and any outstanding liens. Banks will not negotiate the terms of a REO contract, and the contracts typically (a) require the buyer to use the bank’s title company to close and (b) relieve the bank from any liability whatsoever regarding the state of the property when purchased.
For these reasons, we encourage buyers of REO property to hire an attorney to represent them in the transaction. Otherwise, the buyer has no representation, as the title company represents the seller and not the buyer. The following are some of the issues that a purchaser can expect to encounter in a REO transaction:
- Little, if any, ability to negotiate the terms of the contract (other than price);
- The buyer is not allowed to control the closing because the bank requires the use of its title company, yet requires the buyer to pay all expenses of closing;
- The bank’s title company refuses or fails to conduct a proper title search, and does not search for municipal liens (including utility liens);
- The prior owners were not properly served with the foreclosure documents, which may allow them to come back and try to unwind the sale;
- The title company refuses to order or review any survey of the property;
- The title company fails to have all proper documentation executed for closing; and
- The contract relieves the bank from any liability for title defects, property defects, liens, or even failing to close, which leaves the purchaser with virtually no recourse against the bank.
Of course, one could attempt to sue the bank or title company under a consumer protection law, but the time and expense of suing a large bank usually far exceeds the benefits. As such, any person seeking to purchase REO property should use great caution in the transaction and seek counsel, or at the very least, independent review of the title commitment prior to closing. As always, should you have any questions regarding the foregoing we urge you to consult with your local real estate attorney.
Berlin Patten Ebling, PLLC
Article Authored by Michelle Champion, Esq. firstname.lastname@example.org
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