| When an investor buys an REO (bank-owned) | | | | offer on. |
| property he will submit a contract to a listing agent. If | | | | 3. Another big issue is that there may be title |
| the foreclosing lender is a smaller local or regional | | | | deficiencies in the chain of title and lien or code |
| bank, he may make an offer to the asset manager | | | | violations against the property. Any past due or |
| directly at the bank. The seller will reject, counter or | | | | accrued property taxes should be paid by the seller, |
| accept the investor's offer. In addition, the seller will | | | | even if they don't want to pay them, they should. |
| give the investor a contract addendum that has to | | | | Everything is negotiable but stick to your guns on this |
| be signed to make the contract valid. | | | | issue and have the lender further reduce the price of |
| This addendum overrides any and all clauses that | | | | the property to cover these taxes if they persist in |
| were in the initial contract the investor submitted. | | | | having the buyer pay. |
| Essentially, all the clever effort and clauses the | | | | The code and water or sewer liens against a |
| investor chose are null and void if there are changed | | | | property can be very substantial, even many times |
| in the addendum. The actual addendums can be from | | | | the value of the property. In years past, cities and |
| a few pages to as many as 40 or 50 pages. It is | | | | counties worked with buyers to reduce liens to a |
| important that an investor, or a potential | | | | couple percents of their face amounts. In today's |
| homeowner, buying an REO, should read the | | | | environment, cities and counties have been forced to |
| document in its entirety. Any questions should be | | | | find revenue streams besides their tax base with the |
| addressed by an attorney, because of the potential | | | | result liens are being paid at 5% to 100% of their |
| consequences after the purchase. | | | | face. Always be careful about the true cost of what |
| The clauses that we find most onerous and the | | | | the lien will be paid off at. The preferable situation is |
| hardest ones where they can be a deal-killer are: | | | | to have the seller pay the liens and fines through the |
| 1. The inspection period for the contract should start | | | | closing. |
| when the last signatory signs the addendum. The | | | | Often, asset managers will want the investor-buyer |
| inspection period can vary from zero to 10 days in | | | | to pay these liens and this could be a deal-killer or can |
| the usual circumstances but can be for months if the | | | | make a great deal. Take the time to get the actual |
| area sells very few properties and there are a high | | | | lien payoff from the municipality, and what needs to |
| number of REOs. | | | | be done to bring the property into compliance with |
| 2. Ideally, the escrow deposit should be as low as | | | | current code laws, and it could be a real deal if these |
| possible to reduce the investor's exposure to loss. | | | | costs are reasonable. Otherwise, be extremely |
| Generally, a minimal acceptable amount is $500, but | | | | careful because of municipalities not negotiating liens |
| FNMA often requires 10% for investors but only 3% | | | | and your getting stuck with a lien the seller assured |
| for buyers who will live in the property. Whatever | | | | you would be reduced. |
| the amount, it is at risk if the investor does not close | | | | In summary, be careful buying REO properties |
| on the purchase. | | | | because of the addendums from the seller and the |
| As a buyer in a real estate transaction, your loss is | | | | issues or problems that could be attached to the |
| limited to the amount of your deposit. However, as a | | | | property and that will be assumed by the buyer. Do |
| seller in a real estate transaction, your potential | | | | your own research and don't trust what the seller |
| exposure is a law suit for Breach of Contract which | | | | tells you about what will be taken care of when you |
| can be far in excess of the buyer's deposit. Be | | | | close and what will happen thereafter. I have found |
| careful of signing a contract as a seller before the | | | | so many title defects on REOs that I actually pay a |
| buyer has signed the contract or you could be stuck | | | | title company to shadow every deal that I purchase. |
| in a contract that you didn't want or got a better | | | | |