Bank Owned Properties (REOs)
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Buyer Issues When Buying Bank Owned or "REO" Properties
Purchasing a home from a bank seller is usually very different than buying from a homeowner seller. There are many factors to consider when buying this type of property.
Many buyers think they will be buying an investor-owned or bank-owned property at a bargain price, but that is often just not the case. Because of that perception, many buyers may be attracted to one property, driving up the price, which can lead to further appraisal issues during escrow.
If a problem is found during the home-buying process, it may take the bank longer to resolve the issue than it would a homeowner. Most often, the bank is unwilling to negotiate any repairs, and the bank may insist that the buyer use the bank's preferred services and refuse to pay for any services chosen by the buyer. Buyers are advised to read bank addendums carefully, as well as review all responses from the bank. If the buyer decides to allow the bank to choose the title company, for instance, review the preliminary title report very carefully and verify the level of homeowner coverage that the title company says it will issue. Some banks are currently employing title companies which are not issuing complete CLTA/ALTA title policy coverage. What does that mean to you? It means you may not be getting full standard residential coverage for your home and will not have certain protections as a homeowner, and you should carefully review the preliminary title report for the type of policy being issued--ask for a comparison chart from the title officer.
That is not to say that all banks will be inefficient or take longer, but the buyer should be aware that there may be little or no control over the exact closing date, or the bank will include contractual clauses requiring penalties if the buyer delays the closing, or some other part of the escrow, while the bank personnel deal with the transaction on their schedule, not the buyer's.
In previous years, when home prices were increasing, banks didn’t have to keep foreclosed homes on their books long. Often, investors would purchase the foreclosures through court auctions. However, as home prices declined, especially in the past two years, many investors decided to delay purchasing new properties. Banks then had to concentrate their efforts on selling to the general public, which often takes longer. Bank-owned properties may not be in top showing condition--they may in fact be "cosmetic fixers" and are being sold "AS-IS".
When a bank repossesses a home, it typically conducts a title search to determine whether there are other claims on the property. The time frame is usually from when the owners took out the mortgage to the time the bank repossessed the house. Any pre-existing condition problems, or new ones, usually surface at closing time, when a more thorough search is performed by the buyer and his/her physical inspector.
Buyers should be aware that banks usually sell homes in an “as-is” condition, and on the bank's terms. Even though buyers are informed of this before beginning the home-buying process, some are unwilling to agree to the bank’s terms when it’s time to finalize the deal and sign addendums to the contract. In today's market however, fewer properties seem to be rehabbed, and the bank often wants to sell the property "as-is" with little or no negotiability for repair. In addition, many of the bank's additional addendums seem very one-sided and designed to protect the bank, and, once again, a buyer is advised to read these addendums carefully since some terms and conditions may conflict with the standard terms of the buyer's offer. For instance, you may end up paying for your own title policy because you refuse to use the bank's preferred choice, you may not get the home warranty company or escrow company of your choice. The bank may ask you to sign an extensive multi-page addendum which absolves it of all future claims.
If you're planning on making an offer on a bank-owned property (or REO, "real estate owned"), you should include with your offer the California Association of Realtors' REO Advisory which addresses in greater detail conditions or circumstances which may be part of your transaction with the bank. Be aware the bank may not be willing to sign that advisory. While it will not change the bank's response to your offier, it will make you, the buyer, more fully aware of what you should expect in the transaction. This is a very different type of seller-buyer relationship than a motivated "live-in seller" who is willing to deal with a motivated buyer.