Alternative Foreclosure Help,Loan Modifications, Short Sale Buying and Selling

REOs have been a major part of our market for several years now. Despite their prevalence, the challenges on the buyer side can still throw us for a loop.  There are battle stories all over our nation with agents who have trenched through some difficult transactions and come out with a deal. Hands down, the most-often-mentioned advice was the importance of educating buyers about the REO process before you begin driving them around town.

Sometimes I find myself a “teacher” of sort…  New investors and more and more home buyers are actively buying foreclosed homes, have little to no experience dealing with the Big Banks; I take on the role of educator at the outset, and I am likely to have a happy buyer at the end. Here are some topics you’ll want to discuss:

Highest and Best.

Negotiating with an asset manager is different than negotiating with a traditional seller. If an REO property seems to be a steal, it is more likely to receive multiple offers. Counter offers and demands for “highest and best” are par for the course. Asset managers want to show they got the most money they could for the property. In consultation with me, a buyer must decide what the house is worth to them and what negotiation strategy best suits their personality.  I provide buyers with comparables in the area of actives and sold homes and even pending sales.

Verbal Response.

Once an offer is made, the counter offers for REOs are generally verbal—which means that another buyer can swoop in with a better offer anytime. Even once “agreement” is reached, there can be a gap of days or weeks until a contract is actually signed. It is important for your buyer to understand that until both parties have signed the contract, there is no real deal.

Timelines.

And yet! Just because you don’t the signed contract does not mean that the clock hasn’t started ticking on critical time periods. Be sure you understand the terms of the addendum indicating when exactly timelines such as the inspection period begin. “Check. Don’t just believe what you hear”

REO Addendum.

Standard contracts are written to balance the interests of buyers and sellers. An REO addendum shifts the balance firmly in favor of the seller or bank.  For example, an addendum may require the buyer to pay a per-diem for each day of delay on the closing regardless of who’s at fault.

While much of the language is non-negotiable, it is extremely important that the buyer understand the addendum. This is where we remind buyers —in writing—that your buyer consult a lawyer. Of course, you’ll still have to get out your eyeglasses to read the fine print because important information (such as when escrow opens or when the inspection period begins) is included in there.

As Is.

REO properties are typically sold “as is.” This means both that it is unlikely repairs will be made and that the bank is trying to protect itself against disclosure issues. The bank’s contract documents purport to disclaim all warranties and representations in an effort to limit potential liability for nondisclosure, Still, a seller, even in an REO transaction, has a legal obligation to disclose known defects.

SPDS.

Most REO sellers will not provide a Seller’s Property Disclosure Statement (SPDS). A buyer’s broker should nonetheless provide the buyer with a blank SPDS. The buyer can and should utilize a blank SPDS as a checklist in conducting the desired inspections and investigations.

Due Diligence.

The biggest thing I stress is the inspection period, If you don’t like what you see, do your inspection, do your due diligence and consider all your options.

Doing due diligence as an agent includes double-checking that all zoning and setbacks were properly adhered to. It could save a buyer Thousands in the cost of tearing a shed or other construction down later—not including possibly city zoning violation fines
Some buyers balk at paying for a home inspection when the property is offered as is. Even if they won’t fix anything, you still have to know what you’re buying.  In fact, in an as-is situation with minimal disclosures, a thorough home inspection may be even more important than usual. With REOs, it’s a buyer beware world.  A bargain on the sticker price doesn’t mean it’s a bargain under the hood.I recommend home inspectors, m that are licensed and insured. If the buyers refuse an inspection, I have them sign a letter stating that you have informed them of the importance of an inspection, and they have elected against it.

Utilities.

Getting utilities turned on for inspection can be a challenge. The contract obligates the seller to have the utilities on for inspections, but occasionally the addendum may change that. Different banks handle the issue differently. At one property, a listing agent may refuse to be involved in the process. At another, a bank may insist on coordinating the de-winterization itself to ensure it is done properly. At a third, an inspector may arrive to find that the utilities promised to be on still aren’t.

I suggest adding a clause in the contract stating the inspection period begins “upon verification (written) that all of the utilities are on and the property is ready for an inspection.

Unexpected Expenses.

Inspections can also lead to fees for which the buyer isn’t prepared. Some banks require the buyer to pay to have the home de-winterized and re-winterized. Depending on where you do business, that may not be the only utilities expense.  If electricity has been off for more than six months, a pre-inspection has to be done to determine if the house is safe enough to have the utilities turned on.  That’s a $40 fee right there.
As an agent I don’t want to see my buyers hit with fee after unexpected fee. I warn them about HOA doc prep fees and start-up fees but something as little as re-key the house after closing is an expense. It’s helpful to mention some of the standard fees that will arise, but also prepare the buyer for surprises.

Title Issues.

REO properties have changed hands recently under what can be acrimonious circumstances, so it is especially important to double check title work.  There are a lot of things that title can find out if they’re doing their job.  Having the bank paying for title is a great expense for the buyer but there is still potential for problems called GAP.

Title companies make mistakes. For example, In one instance, the owner of record had not been updated. The listing agent assured it would be handled, but when it came time to close, it was still incorrect and held up the deal.

And some issues aren’t discovered until after the home has closed. For that reason, buyers should increase their title insurance coverage.  Many Banks will provide title insurance but will not cover title Gaps…  I recommend all buyers to pay the GAP coverage.  The little bit spent now provides peace of mind later if something is dragged up.  With all of the problems we’ve seen in the foreclosure process, paying a little bit extra now can save a headache later on.

Inspections.

Buyers need to prepare for Home Inspections, Wood boring Insect inspection, Radon Tests, Water ,Well and Septic Tests, Certificate of Occupancy Inspections and Fire Safety Inspections.  These are out of pocket expenses for a buyer unless negotiated prior or part of the contract.  It is rare any of these are allowed in a Foreclosure or REO property sale contract.
A typical Home inspection  will more than likely be allowed but you must ask for them to be included in the contract.  Usually the home inspector will provide radon testing and even some will do wood boring insect inspections.

Water Well and Septic Tests are definitely a buyers responsibility.  Not your typical home inspectors job.  You must employ a professional experienced in these fields.  your agent can recommend a licensed and insured contractor.

Certificate of Occupancy otherwise known as C/O and Fire Safety Inspections: Banks rarely , if ever provide buyers with this.  So it is up to the buyer, at buyer’s  expense, to obtain such certificates.  Costs are usually around $125 for each and are obtained and ordered thru the township offices the home is located in.  These are required before you can move into the property.   But also if you are financing the home, your mortgage company will make it a requirement before they will you to settle.  Utilities must be on and so arrange for these inspections early when utilities are on when you  have your Home Inspection being done. 

There is nothing wrong with early inspections.  Other than out of pocket costs.  But the sooner you know what may be wrong with the property, the sooner you have done more of your “due diligence .  Every state allows for certain inspection periods.  NJ allows 10 days from signing the contract.  Banks will try to change these in the contract  consult legal advise at all times.

Late Closings.

An REO transaction can easily hit a snag on its way to closing. Talk with your buyers and their lenders about allowing room for a late closing when locking in the loan. No buyer wants to expend additional dollars or risk losing a good rate when re-locking the loan. For the same reason, you may want to counsel your clients to schedule the move only after the final HUD-1 is approved.

In each transaction you complete, you’ll find new wrinkles based on the neighborhood or lender. While this may now be the  “new normal” of real estate in 2011 2012, buyers still need to be prepared for the REO rollercoaster before they strap on that seatbelt.   Real Estate Agents are not lawyers and cannot provide legal advise.  Always seek legal representation.  So make sure you understand all parts of the contract before moving forward with buying any home, not just a foreclosure.

Thinking of buying a foreclosure or a short sale

Call: Larry Sarlo  RE/MAX Preferred  609-868-1171

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Larry Sarlo
RE/MAX Preferred
609-868-1171 call / text / email 7 days
lsarlo@comcast.net
www.larrysarlo.com