APPRISE BUYER CLIENTS OF REO RISKS

Several weeks ago this column included some advice regarding the pitfalls of buying foreclosed properties. The goal of that message was to point out the fact that clients should be advised in advance about the difficulties that can be expected when purchasing bank-owned (REO) properties. Not only are such offerings not always a great deal, negotiating and closing these types of transactions can be very troublesome.

As we close more and more REO transactions, we are discovering more issues with which to be concerned. In almost every case, an REO sale will require the buyer to agree to the terms of a standard bank addendum to the purchase agreement. These contracts normally supersede many of the terms in our standard PA’s including the requirement that the seller provide a timely commitment for a title insurance policy without standard exceptions and pay for same.

These addenda routinely include provisions affecting the conveyance of title. Frequently the sellers agree to provide an online policy with extremely limited coverage or, in some cases, no title insurance at all. Coverage for special assessments and other types of liens, encroachments and survey issues is excluded. In these cases it is highly recommended that the buyer purchase a full owner’s policy on his own from a reputable local title agency.

It is also important to recognize that title is generally conveyed via “covenant deeds” or “limited warranty deeds”. These are little more than quit claim deeds offering no seller warranties regarding title. This is all the more reason to strongly recommend that buyers acquire their own title insurance.

Another problem that has surfaced with REO properties relates to the condition of the property at closing. We are strongly urging that buyers perform a final walk-through inspection immediately prior to closing to ensure that the property has not been vandalized. In the unfortunate event that such vandalism has occurred, the buyer’s only recourse is to refuse to close on the property. Based on provisions included the typical bank addenda, this would constitute a buyer default. For this reason, we are recommending small earnest money deposits in these cases. Buyers should also be clearly advised of this possibility when making the offer so they know their EMD is at risk under these circumstances.

Buying foreclosed properties can be considered a good opportunity only if a buyer has been properly advised of these risks and structures his offer to purchase accordingly..