Part 6 of Distressed Properties are NOT Black Holes!, a six part series by Sussex County NJ real estate pro, Irene Kennedy
REOs do present some challenges that may or may not occur in other types of real estate sales. I'll provide the most common issues I encounter around Sussex County, NJ - and bet my colleagues will add lots of other snafus!
Unknown conditions. The bank has no history on the property. It does not know if there is an old oil tank buried. The age of the roof is a mystery. Most banks have not even had one of their own employees visit the property. The BPO and photos are normally the basis and extent of the bank's knowledge. I've never had a bank hire a home inspector to do a more thorough job. So, yes, there is more risk for a buyer. This is true not just for foreclosures in Sussex County NJ!
Speed. Bank's love contracts that call for a closing in 30 days or less. They don't like to hear 90 days, 60 days. I did have one agree to a 45-day window but it actually closed earlier than that. Most banks specify that the buyer pays $XX per day for each day the closing is delayed - for any reason other than the bank extending.
Unusual Aspects.
- Shifting costs: In my primary real estate area within Sussex County, sellers normally pay for water/well testing, a Certificate of Occupancy and some other low-cost items. With REOs, the cost and responsibility is often shifted to the buyer.
- AS-IS: Means exactly that; what you see is what you get. What you don't see is also what you get. The bank will not do or discount the price toward repairs; these are taken into account with the list price.
- Disclosures: There will not be a Seller's Disclosure because the bank has no historic knowledge; what you see is what you get.
- Home Inspection Timing: Some banks insist any home inspections be done prior to submitting an offer. Many buyers refuse to pay for a home inspection before knowing if the seller (the bank) will accept their offer. For my most recent closing of one of my REOs in Sussex County, I had a terrible time as buyers walked away and put in offers on places where inspection followed a contract. Only a licensed general contractor who was not going to do a home inspection at any point submitted an offer (lowball). I eventually persuaded the bank to permit a home inspection within 5 days of an accepted offer. I contacted every agent and the buyers to whom I had showed the home - and the offers came rolling in.
- Part 1 - Distressed Properties are NOT Black Holes!
- Part 2 - Short Sales can be a great thing despite Timeframe & Lowballs
- Part 3 - So You Want a Foreclosure: Bank-owned Properties - REOs
- Part 4 - Want to Steal a Foreclosure? Get the REO facts.
- Part 5 - Consider a Foreclosure - Advantages of REOs
- Part 6 - Pitfalls of Foreclosures. Disadvantages of REOs for Buyers
Even though the bank will not do anything based on the inspector's report, I still highly recommend all home buyers in Sussex County NJ do a full home inspection on an REO property. Regardless of its timing, this is a sound investment and might uncover some non-visible problems. The home inspector said the place needs a new roof? Based on the big blue plastic tarp nailed onto the roof over the hole that opens into the living room where the tree fell, I'd vote that a new roof comes as no surprise... All buyers should have an expert opinion on the condition of the property they are considering, just to know fully what they are getting and to decide if they really wish to proceed with the purchase based on all facts.
Fully Executed Contract. Deal is done. Banks very rarely change any terms once that contract is ratified. Do not expect concessions afterwards. If something really surprising pops up, such as a very high radon reading, it probably wouldn't hurt to ask for a modest adjustment, but I've not yet had a bank agree.
Repairs. AS-IS really means as-is. If the property had no toilet when it was listed and when you saw it, the bank will not be buying a new toilet. For the REO I mentioned in the above paragraph, when the first offer was accepted, the buyer promptly did a home inspection. Based on that, he came back with "must fix" items or dollar equivalent and the bank politely said go fly a kite. That listing, the buyer, his agent, and the fully-executed contract itself had been clear about As-Is and most of the items were quite apparent with the naked eye.
Negotiations. 
No face-to-face chats. When I represent the buyers of Sussex County homes for sale, I often ask the listing agent if he or she can arrange to have us sit down together with the sellers to present my buyers' offer and to negotiate a deal. (Buyers not present but "on standby" via phone.) This isn't a possibility when the bank owns the property. Furthermore, the bank does not give a hoot that Sally & Jim look forward to raising their growing family in this home. The bank doesn't care of the local chapter of the Hell's Angels is purchasing the REO. The bank cares about the bottom line and the speed of the closing. The listing agent prepares a "net sheet," preliminary HUD-1 or similar form to show how much money the bank will net, based on the offer presented.
Copyright © 2009, Irene Kennedy, all rights reserved. This blog post from RealtorIrene.com represents Irene's personal musings.
Considering selling a home or looking to buy one around Sussex County, NJ? Benefit from creative marketing, top negotiating skills and vast real estate knowledge by contacting Irene via the data to the right or HomesIrene.com.
Irene Kennedy, who is a NJ real estate agent with Weichert, Realtors, lives in Sussex County & works from the Hamburg office. Her primary market includes: Augusta, Branchville, Crystal Springs, Frankford, Franklin, Hamburg, Hampton, Hardyston, Highland Lakes, Lake Mohawk, Newton, Ogdensburg, Scenic Lakes, Sparta, Stockholm, Sussex, Vernon, Wantage.
Irene--Interesing...I agree that banks do prefer clean offers. It may be different in different areas but I have had banks agree to the inspection after acceptance (even in multi offer situations) and the buyers have been able to renegotiate for a repairs that were not visible. Homes are not put into pending during the inspection process as a general rule so the bank could take back up offers during the inspection period. You are right on the money with the closing time...30 days or less gets the deal...Good strong qualifications don't hurt either. Bottomline is dealing with banks is different than dealing with traditional sellers so buyers need expert advice in the process.
Teri,
Here we need to mark listings "Under Contract" once signed and through Attorney Review. Doesn't matter about subsequent inspections. Once UC, potential buyers no longer sees the listing on the public sites like realtor.com and few agents will show the property.
For one REO I listed, buyer put in contract "No other offers may be presented to the seller until 5 days after the home inspection." Bank agreed to this caveat. Seller's attorney interpreted this as the listing agent could amass offers but not forward them to the bank - which I got in writing. Didn't come into play, as inspection was rapid and deal closed quickly.
But it is a stipulation I'm going to keep in mind for my buyers. Seller - bank or otherwise - may not agree, but no harm in asking.
What happens to earnest $$ if the buyer decides the home needs to much work? since there is no option period, does the buyer automatically get earnest $$ back?
Thea,
In my area, our standard contracts cover this so that the buyer would be likely to get a full refund. We also have attorneys reviewing contracts to best protect the buyer and seller.
Your excellent questions are just one more reason you should have a local real estate agent working with you. She or he would know the ins and outs of your area.
On the right side is my phone number and an link to email me - use one or the other and I can help you find the right professional in your area to guide you.
Irene
Hi Irene;
Great post and very informative, I do appreciate you sharing.
Anthony,
Hope it helps. Thanks for stopping by.
This is good. I wonder if this applies across state lines or is only applicable in NJ - it would be good if there were uniform rules for these things across the country...
William,
I'd bet some of it crosses lines because the banks I've dealt with aren't NJ corporations. They have foreclosures all over the country. Sure, there are always local issues - say, septic vs. sewers.
But a bank will want a quick closing no matter where the REO is located, can't possibly have a history on a home it just acquired and has never seen up close, etc.
You are absolutely correct: the lack of uniformity - even between different banks with REOs in the same state - makes it more challenging.