Need-to-knows when buying REO

REThink Real Estate

By Tara-Nicholle Nelson, Thursday, May 7, 2009.

Q: My husband and I are in the process of buying a foreclosure property, as is. The property is not in bad shape, but it is missing the air-conditioning units and a few other items. The bank did sell us the property at a low price, but I am afraid of the hidden things that I don't see. Can I make them give me a disclosure statement? Do they even have one?

A: You've clearly stumbled across one fundamental truth of buying an REO: You're not buying from a person! You're buying from an organization -- an institution -- a corporation. This has numerous, different implications at every point of the buying process. The decision-makers have totally different motivations and guidelines than individual sellers do.

Mindset Management

Picture yourself as David vs. the Bank's Goliath. Go into your deal understanding that all the contracts will be written up as favorably toward your opponent as possible without being declared unconscionable. Kick off your escrow with the understanding that the bank's own boilerplate counteroffer and addenda will be bulletproof in changing all of your state's standard real estate practices to go against your interests and protect the bank, and making sure that you could never successfully sue the bank should a surprise problem later arise with the property. And walk in with your eyes wide open to the fact that your escrow might be bumpy.

But also go in knowing it could very well be worth it to get (a) your dream home (or at least your pre-dream-home home), (b) a great price, or (c) a house at all on today's market -- depending on your price range, and where you're at geographically, you might find that many or most of the homes for sale in your market are REOs so, as my Mom used to tell me about my little brother, you might just as well learn to live with them!

Don't let all this deter you from buying an REO. Instead, let it inform your perspective and your action plan. Instead of relying on the bank to give you as much information as possible, like you would expect from an individual seller, rely on yourself and your team of inspectors to obtain all the information possible to uncover before you remove your contingencies or waive your objections.

Need-to-Knows

One more need-to-know about doing the deal with the bank -- the bank never lived there! And, for that matter, the bank's break-up, so to speak, with the folks who did live there (the former owners) was very likely, shall we say, less than warm-and-fuzzy. So the bank has absolutely no information whatsoever about the condition or history of the property. Many states totally exempt banks from making substantive disclosures about the properties they own and sell. Any forms you can get from the bank or their listing agent are likely to be liberally sprinkled with "N/A" or "Unknown" in every blank that calls for the information you care about. ...CONTINUED

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Submitted by Tom Lindemann on May 7, 2009 - 3:41am.

This is a very good answer - basically buying an REO is "buyer beware" - do your inspections and pay attention to them.

Most investors understand this process, however many owner occupieds do not - they think the bank will respond as a normal seller would as far as disclosures and repairs. How can the bank or its agent know any more than what a diligent walk through and inspection reports will show? And then any repairs are likely to be limited to Section 1 and a maximum dollar amount.