Bank-Owned (“REO”) properties refer to real estat that has been acquired by the lender as a result of foreclosre. (that is, the term REO refers to Real Estate Owned by a “Bank” .)

REOs can provide opportunities to  buy a home at a bargain price since the lien holders want to recover as much as they can of their investment quickly.  (The holding and marketing of real estate is not their principal business.) 

The properties that do revert to the lien holders after foreclosure are offered for sale, and many do show up as “REO” or “Bank Owned” listings on the local Multiple Listing Service (even though they may not really be owned by a bank, as explained below.)

 As you probably know, most banks sell off their mortgage loans to raise additional money for new loans.  The mortgage loans are sold to “Fannie Mae” or “Freddie Mac” (two entities that are now wholly owned government agencies), or to private investors.  After having sold off the mortgage, the bank  may continue to be involved as a “loan servicer” (managing the collection of payments, escrow of tax and insurance payments, etc.) for the purchaser of the mortgage. 

 While, as noted, these properties can represent an attractive purchase opportunity, there are a number of traps in the purchase of an REO property, and this post is an attempt to highlight some of the issues you need to be wary of.

 (Note that the following discussion is specifically related to real estate transactions in California.  However, the general issue discussed is likely to be relevant elsewhere.)

 The process for submitting an offer on an MLS listed REO is similar to submitting an offer on a non lender-owned property.  That is, both types of transactions are initiated by the potential buyer submitting a purchase offer to a agent.  (If a real estate agent is representing the buyer, then the offer typically involves the use of a standard purchase agreement developed and approved by the California Association of Realtors.)

 While Fannie Mae and Freddie Mac have stated that they would adopt the local contracts in use in various jurisdictions to facilitate REO sales, that is not quite what happens.

 Unlike traditional sales, where there is a formal give and take regarding the terms of the proposed transaction through the use of written Counter Offers, that is not typically done for REOs. 

Instead, the communication o fcontract changes from the seller can be largely verbal, including up to the point of a “verbal acceptance” of the offer.

(Note that a verbal acceptance of an offer does not really have meaning since contracts for the purchase and sale of real estate must be in writing and signed by the parties.)

After providing the “verbal acceptance”, the service providers (as instructed by the lenders) note that all the buyer needs to do is to sign a simple “addendum” and the lender will then sign both the purchase agreement and the addendum also.

What they frequently fail to mention is that the addendum is really a counter offer that changes the terms of the purchase agreement, and may contain convoluted and ambiguous terms.

If that issue is raised by the buyer or the buyer’s agent, the response is that the addendum is largely non-negotiable.

One example of the problem this can create is in the area of the contingency removal for completion of inspections and other investigations. 

Under the default provisions of the C.A.R. purchase agreement, a buyer has to affirmatively remove these contingencies before the buyer’s earnest money deposit is at risk if the buyer later withdraws from the transaction.

Under the REO addendum, the contingency removal is changed to what is referred to as “passive” removal.  That is, unless the buyer submits a written disapproval notice, the contingencies are deemed removed as f the contingency removal date.

Also, some of the addendums “nest” the contingency removal period – that is, the addendum may allow for 10 days for contingency removal, but only 5 days for any issues disclosed from an inspection of the home by a home inspector.  (So one has to keep both time periods in mind, along with the rules regarding when the 5 or 10 day period ends.)

Also, the addendum may note that this contingency period will start on the date of “verbal approval”, rather than the date that the contract actually became a binding document by being signed by the “bank”.

In one transaction, written acceptance did not occur for 4 or 5 days from the date of  verbal acceptance, and the listing agent would not allow the property to be inspected until the signatures were finalized.

Further, at that time, the “bank” required that the buyer utilize an out of area title and escrow company that they had specified, and that company was slow in providing the necessary documents for review.

To avoid putting the buyer’s earnest money deposit at risk before information regarding easments, covenants, etc. could be reviewed (and to allow for enough time to physically inspect the property), it became necessary to submit repeated “notices of disapproval”  requesting that the contingency period.

So be wary of the documents that you may be asked to sign if purchasing an REO, and keep in mind you need to stay on top of the time periods specified in the transaction.

There were other issues in the transaction (some of which also arose from the addendum), and I’ll address those in another post.

What I found particularly disturbing in the above is that the “bank” was one of the government agencies noted above. (an entity that is owned by all of us as taxpayers; and an entity  that we are also bailing out to the tune of billions of dollars.)

That such an entity appears to be trying to trick or trap consumers is, in my opinion, outrageous.  

President Obama, lets correct this situation now!

What do you think?

This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable as of the date of writing, but is not guaranteed. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts.  This information is provided as a courtesy to our viewers to help them make informed decisions.