Originally Published: 4/5/2012

As lenders have stepped up their efforts to foreclose on mortgages, the obvious end result is an increase in what is referred to as REO Property.  This is shorthand for bank owned property. While REO property purchases can come with certain discounts (some quite significant), it is extremely important for anyone who is acquiring REO property to also understand the risks.

REO property is typically property that has been left idle for some period of time, and as such, is exposed to the risk of known and unknown damage. As a result, lenders who sell REO property typically do so with fairly detailed and comprehensive disclaimers and waivers of liability. In essence, one who buys REO property does so completely at their own risk, and these waivers/disclaimers are generally non-negotiable. This is fine, as often times the prices reflect this fact. However, anyone who acquires REO property should perform fairly comprehensive physical inspections to understand that risk and also perform a follow up physical inspections of the property on the closing date. We have seen instances where damage, destruction, or even theft has occurred following the more comprehensive inspection, but a final walk through on the day of closing did not occur. The buyers in those instances were left with the choice of either suing their lender (an uphill battle at best) or absorbing the additional cost of repairing the property, neither of which are terribly cost effective options.

Also, REO property is conveyed to buyers with less than full warranties of title, and such transactions are usually performed by title companies selected by the lenders themselves. The closings involving REO property typically involve the attempt to use documents that may not be legally enforceable (or may not legally convey title to the buyer), or the attempt by title companies to charge buyer’s inappropriate (and sometimes illegal fees). And although lenders should be delivering marketable title to buyers of REO property (i.e., title that can be conveyed to a third party without resolving title issues), much like the foreclosure mess a few years ago, the “title mills’ that lenders often times use do not do so. And worse yet, buyers of REO property usually do not even know if title to their REO property is unmarketable until they go to sell the property down the road.

As such, while we do not mean to discourage anyone form purchasing REO property, we do strongly recommend that anyone acquiring REO property obtain the services of an experienced inspector to perform comprehensive inspections of the property, and a real estate attorney to make sure that the closing is being handled properly and in the most cost effective manner to the buyer possible, and that proper title will be conveyed to the buyer.

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