Friday, January 9, 2009

REO Transaction Red Flags

So you want to buy an REO (bank-owned) property? Most homebuyers I talk to, be it first-time buyers or seasoned investors have their eye on REO properties. Several questions arise as they consider these purchases: 1. Are they a good deal? 2. Is the buying process easier or harder than a “regular” non-REO property?

Well, I will leave the first question to the seasoned real estate professionals and Realtors to answer but with respect to the second question, is the process easier or harder depends upon many variables. One thing for sure, as a buyer, brush up on your coping skills!! Here are some points to ponder:

1. Does the buyer know that REO lenders can take a while in coming back with an answer to the offer? This will likely mean that if the buyer needs to close and move into a house in 3 weeks, REO is probably not the answer. Often times the REO lender is so busy and acceptance or a counter to the offer requires additional investor approval, which could take anywhere from several days to several weeks.

2. Does the buyer know they are buying the property “as-is” in most cases? This means that if the property is in need of basic repairs just to make it habitable and the buyer does not have money for those repairs and REO lender is not willing to repair nor credit for repairs, once again REO may not be the answer.

3. Does the buyer know that they may experience delays in the closing that may not be their fault? After the lender accepts the offer (contract ratified), things can come up prior to closing that may delay the settlement by days and sometimes weeks, will talk more about that in a minute.

4. Does the Listing Agent have a good relationship with the REO lender? Specifically, the Asset Manager, so when issues arise throughout the transaction they are resolved promptly. This is always a plus but sometimes the best relationship out there may not be enough to make the process move any faster, so just be prepared.

5. Does the buyer understand that closing usually comes down to the wire and may or may not happen as expected? Don’t load up that moving truck yet!! This is when an REO transaction can get really complicated and if you are not using a competent and seasoned settlement agent who truly understands REO processing, you are asking for trouble.

These are just some examples of what we have seen frustrate some buyers, but let’s talk about some potential “deal-breakers,” meaning issues that are very difficult to address in a short amount of time. Those are the ones that must be resolved prior to settlement and if not, you have no deal. So here are a few:

1. Was the foreclosure done correctly or is it defective? You wouldn’t think this would be a big issue but from what we’re seeing lately, it can be. It is not uncommon to examine the foreclosure documents and realize that the lender only foreclosed on the husband but not the wife. The lender foreclosed on the wrong property because the legal description on the deed of trust was wrong. The lender forgot to send out the required notices to one of the junior lien holders to notify them that a foreclosure was taking place. Once again, this is where an experienced settlement agent can catch these problems early on in the process and fix them as quickly as possible.

2. Do we have a deed signed by the seller, and I mean the real seller? Wow…how simple it sounds now that I am typing this! Often times the REAL seller is an entity far removed from the servicing company with whom we have been dealing. This is when we look at who signed the deed to the buyers and determine if they had proper legal authority along with proper documentation to sign on the real seller’s behalf. This often comes down to the last minute and if not handled correctly, the buyer may end up buying a property and acquiring title by virtue of a defective deed.

3. Is the HUD1 approved and signed by seller? Once again it sounds basic but this can also cause issues and is often a last-minute situation. REO lender (seller) usually requires 24-48 hours to review and approve the HUD1 settlement statement (balance sheet to the transaction). Once again, it is not uncommon to find ourselves in a situation where everybody is ready to close but we do not have a final HUD1 approval from the REO lender. This is when the good relationship with the asset managers I talked about earlier comes in handy.

4. Are we there yet? Getting a “clear to close” status from title legal review can make or break a deal. Title review will look for things other than just defective foreclosures. Often times there are unreleased liens of record that need addressing prior to closing. This is where some companies will offer the buyer “insurable title” rather than “marketable title”. I will address that in detail in another post, but in short, when a buyer gets “insurable title” to the property, they are getting a property with unresolved issues, what I call baggage on title but a title insurance company agreed to insure the transaction anyway. Don’t panic, buyer is still insured and owns the house but there is a technical difference here.

So what’s the bottom line on all this? I am of the opinion that buyers need to be prepared and expectations need to be set early on in the process by the buyer’s REALTOR so they know what they are in for. Additionally, it is imperative that you hire a competent settlement agent who processes and closes REO transactions, lots of them, on a regular basis. This will help cut down on the frustration and increase the chances of closing on time. Happy REO hunting.