In this chapter: • When all alternatives are exhausted: foreclosure • Forced sale of property • Redemption • When the property fails to sell at foreclosure sale: REO 5. Foreclosed and Real Estate Owned (REO) Properties 5-1
Dec 28, 2015
In this chapter:
• When all alternatives are exhausted: foreclosure
• Forced sale of property• Redemption• When the property fails to sell at
foreclosure sale: REO
5. Foreclosed and Real Estate Owned (REO) Properties
5-1
When All Alternatives Are Exhausted
5-2
• When refinancing, short sales, and/or loan modifications don’t work, only one option:
> Foreclosure
5-3
• State foreclosure laws determine:
> How proceedings will take place
> Length of time to complete proceedings
> Outcome
State Foreclosure Laws
5-4
• In judicial foreclosure (loan instrument is mortgage):
> Foreclosure or court-ordered action is typically used to execute foreclosure proceedings
Judicial Foreclosure
5-5
• In non-judicial foreclosure (loan instrument is deed of trust):
> Generally takes less time than judicial foreclosure
For an overview of judicial and non-judicial processes, see Figure 5.1.
Non-Judicial Foreclosure
5-6
Forced Sale of Property
• Foreclosure requires forced sale of property, commonly through an auction
• In some states, forced sale happens via a trustee sale
5-7
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
5-8
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
5-9
Buyer Considerations
• Buyers may not receive clear title
• Buyers may be impacted in states that offer borrowers the right of redemption
5-10
Redemption
• Redemption period: Right of borrower to recover a property after foreclosure sale
• Period varies from state to state
5-11
When Property Fails to Sell at Auction
• When foreclosed properties don’t attract bidders at auction, the property is considered real estate owned or REO
• REO means ownership of the property or asset has been involuntarily transferred to the lender
5-12
Listing REO Properties
• Know what you are agreeing to
• Verify whether or not your E&O insurance covers activities required for REO listings:
> Hiring and paying service providers and contractors
5-13
Listing REO Properties
• Note: Many banks and/or asset managers are requiring deposit of earnest money at time they verbally accept buyer’s offer
• This is often in violation of state license laws and needs to be explained to seller and modified in listing agreement
5-14
Showing REO Properties
• Use the following search terms:
> Bank owned
> Lender owned
> Foreclosure
> REO
5-15
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
5-16
Don’t Allow Client Unsupervised Access
• Serious error is to give buyer client access code or lock combination to enter these properties without licensee
• In many states this would be considered violation of license law and/or MLS rules
5-17
Writing Offers on REO Properties
• Lender’s internal cost to foreclose can be significant
• REO transactions are investment driven
5-18
Writing Offers on REO Properties
• Buyer’s chance of offer being accepted greater when:
> Buyer makes offer based upon market value
> Buyer has been pre-approved for financing
> They ask for closing date that is sooner rather than later
5-19
Writing Offers on REO Properties
> They agree upfront to “as-is” transaction
> They do not have any home sale or home close contingencies
5-20
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
5-21
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
5-22
Addendum Issues
• Altering inspection period
• Modifying seller warranties
• Changing financing provisions
• Imposing monetary penalties for buyer’s failure to close
• Containing mold and other environmental disclaimers
• Limiting seller’s liability
5-23
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
5-24
City POS Inspection
• Some cities require a point of sale (POS) inspection to assess safety, soundness, and security of property
• Customarily, buyer corrects violations unless seller fixes them
• Many cities require escrow fund to cover costs of repairs
5-25
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
5-26
Closing Dates and Per Diems
• Asset managers prefer closings to take place at the end of the month
• Most sellers charge a daily penalty for every day the buyer is late in meeting the contract closing