5 Foreclosed and Real Estate Owned REO Properties

5. Foreclosed and Real Estate Owned (REO) Properties In this chapter: • When all alternatives are exhausted: foreclosure • A closer look at foreclosure sales • When the property fails to sell at the foreclosure sale: REO 75

When All Alternatives Are Exhausted: Foreclosure • When refinancing, loan modification or short sale doesn’t work, only one option: foreclosure • Results in forced sale of property and eviction of homeowner 75

Non-Judicial Foreclosure • In non-judicial foreclosure (loan instrument is deed of trust): Ø Generally takes less time than judicial foreclosure Ø Borrower preauthorized the sale of the home upon default in loan document 75

Judicial Foreclosure • In judicial foreclosure (loan instrument is mortgage): > Foreclosure or court-ordered action is typically used to execute foreclosure proceedings 75

Terminology: Notice of Default • Official notice to borrower that they are in default • Formally begins the process • Outlines reinstatement period • Lenders differ on when they send 77

Terminology: Reinstatement • Time stipulated in NOD when borrower can make required payments and bring account into good standing • Can vary by both lender protocol and state statues 77

Terminology: Notice of Sale • After Notice of Default (NOD) • Borrower has not reinstated • After judgment has been entered (in judicial states) • Timing is state specific – often 90 days prior to sale date 77

Terminology: Foreclosure Sale • Commonly an auction or sheriffs sale • Could sell to a ‘buyer’ or could go to bank • Formal process whereby owner is deprived of their asset 77

Terminology: Redemption • Time after foreclosure sale when the owner can redeem the property • State specific as to: • Length • What needs to be paid back • Whethere even IS a redemption period 77

A Closer Look at Foreclosure and Sheriff’s Sales • Listed among legal/judicial notices in local newspaper • Scheduled sale of property is published for specific number of weeks prior to sheriff’s auction/sale 75

Buyer Considerations • Opportunity for property inspections can be negligible or extremely limited • Buyers may be responsible for evicting occupants • Buyers may be responsible for paying outstanding liens 75

Buyer Considerations • Buyers may not receive clear title • Buyers may be impacted in states that offer borrowers the right of redemption 75

Why the Lender Gets the House • Minimum bid lender will take is usually more than value of property • Investors won’t pay it • Home buyers won’t either • Pool of investors diminishing 76

Listing REO Properties • Know what you are agreeing to • Verify whether or not your E&O insurance covers activities required for REO listings • Agents should NEVER take REO listings without permission of their broker 80

Listing REO Properties • • • Occupancy check • Hiring and paying: – well and septic Owner – tenant - ? ? ? – re-keying property Verify lease – winterization Proof of tenancy – de-winterization May have to negotiate – snow removal ‘keys for cash’ – lawn care • Complete trash out – Utilities • Photos – lots of them • Reports – reports and more reports 62 80

Finding & Showing REO Properties • Use the following search terms: > Bank owned > Lender owned > Foreclosure > REO 81

Safety Issues • Know who your buyers are prior to showing • Do not meet buyers at property for the first time • Many REO properties have no electricity; showing them can be hazardous 81

Unsupervised Access Code of Ethics REALTORS® shall not provide access to listed property on terms other than those established by the owner or the listing broker. 82

Writing Offers on REO Properties • Lender’s internal cost to foreclose can be significant • Costs accumulate as property goes unsold • REO transactions are investment driven 82

Writing Offers on REO Properties • Buyer’s chance of offer being accepted greater when: > Buyer makes offer based on market value > Buyer has been pre-approved for financing > They ask for closing date that is sooner rather than later 82

Writing Offers on REO Properties > They agree upfront to “as-is” transaction Ø They do not have any home sale or home close contingencies Ø Some lenders require pre-approval by their representative Ø Some are preferring to do the financing themselves 83

Writing Offers on REO Properties Ø Buying “as-is” does not eliminate right to inspection period Ø Buyer should have: Ø Home inspection Ø Mold inspection Ø Take photos 83

Negotiating the REO Contract • Buyer’s agents should call listing agent for instructions on presentation of offer • Listing agent then submits offer to asset manager • Asset manager will generate addendum for buyer to sign 84

Negotiating the REO Contract • Bank/asset manager determines how subsequent offers will be handled • Until addendum is signed by bank they can entertain other offers and could accept a different one and reject the first • Some do not entertain second offers at all 84

Counteroffers and Addenda • Counteroffer is handled through addendum, which is sent to listing agent from asset manager, who forwards it to buyer’s representative via fax or e-mail • When offer is accepted, listing agent contacts buyer’s representative 84

Addendum Issues • Alter inspection period • Modify seller warranties • Change financing provisions • Impose monetary penalties for buyer’s failure to close • Mold and other environmental disclaimers • Limit seller’s liability 84

Limited Property Disclosures • With REOs, property disclosures may be limited • If buyer client refuses to schedule property inspection, buyer’s rep should ask client to sign an acknowledgment of waiver of inspection 84

Final Walkthrough • Final walkthrough assures same “as is” condition as when offer was presented • Listing agent and seller will have photos of property when it was listed • Buyer’s representatives are encouraged to take photos at time of purchase contract 85

Closing Dates and Per Diems • Most sellers charge a daily penalty for every day the buyer is late in meeting the contract closing • Makes no difference if it was the buyer’s lender that caused the delay 86