Avoid REO Surprises
Avoid REO Surprises
Prepare buyers for everything that might happen in the process of closing on a bank-owned property.
By Vanessa E. Goggans | June 2011
Just when I thought I’d seen it all, my law firm recently encountered an REO transaction with an interesting twist. One day before the closing, a person filed a complicated 14-page affidavit of ownership against the home, proclaiming rights to the property under a “sovereign nation” theory that has little support under real estate law here in Georgia.
This person, whose name had never appeared in the chain of title, sought to unilaterally declare himself exempt from the laws of the United States. He had even gone so far as to break in, change the locks, and rent the property to an unsuspecting tenant. This claimant, who was eventually arrested, and others like him are targeting foreclosed properties because the properties are often unmonitored and easy to identify. This is an extreme example, but it illustrates an important point: REO closings are prone to unusual surprises.
An REO closing is one in which a lender or bank is reselling property following foreclosure. The property is usually one of many, perhaps even thousands, in a bank’s asset portfolio, and the asset manager’s chief objective is to get the property off the bank’s books as quickly and cheaply as possible without subjecting the bank to lingering liability. These asset managers rely heavily on listing agents and form-contract addenda to manage their heavy caseloads.
Because these are not standard transactions, it’s your job to manage the buyer’s expectations.
First, remind buyers that they’re negotiating with an institution, not a warm-blooded seller. Banks do not have an emotional stake, so they’re unlikely to enter into complicated negotiations or be swayed by a buyer’s hardship.
Second, a bank’s asset manager is usually someone who has no knowledge of the property’s history and is in no position to give assurances about the property’s condition. The bank’s primary goal is to make as few representations as possible and to be completely done with the property once it’s closed. That means no lingering responsibility for repairs, no tax re-prorations, and no follow-up calls about where to find the water shut-off valve. Buyers need to be thorough in addressing issues prior to closing, because they lose their right to object to property defects once the ink on the deed is dry.
Third, it’s unwise to assume that title to the REO property will be clean. While it is true that a foreclosure sale will wipe out subordinate liens and the bulk of any problems caused by former owners, it won’t work to extinguish the liens of ad valorem taxes or problems that were missed when the previous owner bought the property. It’s smart for anyone purchasing an REO property to buy a policy of owner’s title insurance at closing.
When listing or selling REO property, consider adding the following items to your checklist:
Above all, encourage patience. Allow time between contract execution and the closing date for the sellers to get documents to the closing agent. Warn buyers that they may need to be flexible if the closing date should need to be postponed a day or two, because the seller’s documents might be buried under a mountain of others.
REOs provide a great opportunity for buyers, but the process can be frustrating. Make it go more smoothly by preparing for the pitfalls.
Vanessa E. Goggans is a partner in the residential real estate practice of Morris, Manning & Martin in Atlanta, representing builders, home buyers, home owners, and lenders. She can be reached at 678-686-6909.
You can contact the staff of REALTOR® magazine by e-mail at firstname.lastname@example.org.
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