What is REO? (Bank Owned) REO stands for “Real Estate Owned” and can also be known as “bank owned.”When a borrower misses payments, the trustee is authorized by the Deed of Trust (or Security Instrument) to conduct a foreclosure which terminates the borrower’s ownership in the property. The property is then sold on the courthouse steps. Unless a bid is achieved higher than the minimum that the note holder has requested, the property becomes an asset of the Bank. Today other companies, called Asset Management Companies, are facilitating the sale of real estate for mortgagors (usually banks) and are the mediators between you and the seller. Many times, you will see listings that list the owner as “owner of record.” Your agent will be sure to have the correct information regarding the owner on the contract. Corporate Owners don’t transact sales in the same was as individual owners. They may not appear cooperative during the process and they may not agree with your assessment of the property’s value. Some may be in the process of bundling properties for a service center to transact the sale or auction so your subject property may be in some state of transition. The listing agent and asset manager working for the corporate owner are key to how the transaction will progress.
As-Is. What does this really mean? All bank-owned properties are sold “as-is, where-is.” The bank makes no guarantee as to the condition of the property or the property on which it sits.
Inspections. Can they be done? Home Inspections: Even though the property is being sold “as-is, where is,” the bank will allow the purchaser to perform a home inspection for informational purposes at their own cost. Most banks will allow the purchaser up to 7 days after acceptance of the contract to perform the inspection. If the inspection is done within the 7 days, some banks will allow the purchaser to void the contract based on the findings. This policy differs, however, from bank to bank and it is imperative that you ask this question up front. If a bank does not allow for the above-mentioned “inspection period,” it would be in the best interest of the purchaser to bring a home inspector along to inspect the property when great interest exists. $$ALERT$$ -- If the utilities are off, you may need to have them turned on in your name for only the day of the inspection so that the inspection can be completed. If the home is winterized, you will need to de-winterize it before the inspection and re-winterize it until settlement. Read on to understand the process of winterization. Termite Inspections: Some banks will pay the $45 to $60 for the termite inspection (this is negotiated during the submission and acceptance of the contract). Other banks, however, will not pay for this inspection. Most banks will not pay for any termite treatment or damage due to termites on the property. Radon Inspections: Just like home inspections and termite inspections, you can request a radon inspection, but the “as is” clause will dictate that the cost of remediation will be the responsibility of the purchaser. Winterization During the winter months, in areas where the weather is typically cold, the property is usually winterized. This means that the water is turned off and all pipes are drained to prevent the pipes from freezing. In this process, air is blown through the pipes to determine if there are any leaks. A leak would be discovered if air can be heard escaping. Winterization does not guarantee that there won’t be leaks when the property is de-winterized. The initial winterization is paid for by the bank. The property is typically not de-winterized until after settlement (at the purchaser’s expense). If the purchaser chooses to do a home inspection for informational purposes and wishes to have the water turned on, the purchaser will need to pay for the de-winterization and re-winterization of the property. The approximate costs for these services are $300 to $400.
Writing the Contract -- Is it the same? Most banks will accept a contract that is written on the MAR Residential Contract of Sale. Most banks, though, will also require certain addendums to be signed by the prospective purchaser upon contract submission. **ALERT** -- These addendums ALWAYS supersede the contract, so prospective purchasers should read them carefully.
Earnest Money Deposit -- Who holds the check? As with any contract for purchasing residential real estate, an Earnest Money Deposit (EMD) for roughly 1% of the purchase price will be required at the time the offer is written. In some cases, a more substantial EMD will be required, but that depends upon the bank. Most EMD checks are written to the listing brokerage and are held in their escrow account until settlement.
Financing -- Are there any differences? You will need to pre-qualify with a lender in order to write the offer for purchasing a property. You may need to pre-qualify with the Bank that owns the property. You will not be required to accept their loan, but they can require you to speak with their loan officer. Some Banks offer incentives to encourage you to use their programs. The same loan programs available to all buyers are available to buyers purchasing REO/Bank-Owned Properties. Some government programs may require the seller to pay specific costs or make specific repairs … and that is okay. Your lender will be able to give you more information about the loan programs.
Response Time -- Do they take forever? Typically, a Bank will respond to an offer within 24 to 72 hours. There are some banks that do not respond as quickly. Patience is the key to this game.
HOA/Condo Documents and Inspections -- Do I get these? Under Maryland law, the Bank is supposed to supply the purchaser with the re-sale packet for the HOA or Condo association. The purchaser then has five days to review these documents and either proceed to closing or void the contract. If the Bank does NOT supply the documents, then the purchaser, at their own expense, may purchase the re-sale documents. We recommend that this be done, because the documents contain important information regarding the association finances, rules and regulations and any violations that may exist on the subject property. If you choose to NOT get the documents and the bank has filed to give them to you, your HOA contingency will expire at settlement. Some “as is” clauses and/or addendums include the obligation of obtaining the property owners documents as your responsibility. $$ALERT$$ -- HOA and Condo Association documents can cost up to $375.
Settlement -- What do I need to Know? For Banks to sell the property to a purchaser, they need to convey “clear and equitable title” … just like any other seller. Due to the foreclosure status of the property, this maay take longer to get than it would in a normal situation. All liens and judgments against the property need to be released prior to the property being sold to the new owner. This is a sticky situation with REO properties. Most of them require or request that you use their title company. The RESPA law, though, allows the buyers to choose their settlement company. **ALERT** -- Many times the bank will link closing costs or owner’s title insurance to using their title company. Investigate using your own local settlement attorney. You may find that you get more representation and the costs may equal the savings. It is in your best interest to use a title company that is reputable and knowledgeable when it comes to purchasing real estate.
LET’S SUM IT ALL UP! When You Find a Property You Really Like …
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