BUYING DISTRESSED PROPERTIES
Buying Real Estate Owned (REO) Property
REO property is generally property that a bank has acquired through bankruptcy foreclosure, or by a voluntary process where the borrower has conveyed it back to the bank "in lieu of foreclosure." In these cases, the bank, or its authorized servicer, becomes in charge of reselling the property on the open market. Property held by a bank through one of these methods is referred to as "Real Estate Owned" or "REO" property. Although most sellers of Oregon residential property are required to answer a lengthy list of questions regarding the property's condition and status (known as the "Seller's Property Disclosure Statement"), banks selling REO properties are exempt from this requirement.
There can be risks to buyers acquiring REO Property. One relates to the physical condition of the property. During the last few years, many homeowners were unable to afford their mortgage payments; or if they could afford the payments, they could not afford normal and prudent maintenance and repair practices. Additionally, some homeowners simply vacated their homes, letting them sit idle until the bank took them back through foreclosure. In other cases, some homeowners ceased making their payments, but remained in the home, or permitted a renter or occupant to do so, until forced to leave upon foreclosure. In these situations and others, by the time the banks reacquired many of these homes, there was much deferred maintenance and repair - some visible and obvious, and some hidden from view. With Oregon's wet winter and spring climate, mold, moisture, and mildew may occur when homes have been left unattended for any period of time. Similarly, operating systems, such as irrigation, septic, plumbing, heating, cooling, electrical, and others, may be in various states of disrepair. Another risk in acquiring REO property relates to homes that were occupied by renters or squatters at the time of foreclosure. Although infrequent, there can be instances of unknown persons in possession of the property following a foreclosure sale or other transfer to the bank. In most cases, however, these situations have been resolved before sale on the open market. In all instances, buyers of REO property should make sure to have locks changed following closing.
When buyers offer to purchase bank-owned property, they frequently use the standard OREF Residential Real Estate Sale Agreement ("the OREF Sale Agreement"). This form contains many standard seller representations regarding the condition of the property, together with other provisions (e.g. remedies and the use of alternate dispute resolution) commonly included in most Oregon residential real estate transactions. However, when selling REO property, banks may insist that their buyers sign an "Addendum" that dilutes many of the standard protections found in the OREF Sale Agreement. Furthermore, banks are not legally required to complete a Seller's Property Disclosure Statement. These facts, coupled with the general lack of bank knowledge concerning the condition of an REO property and the extensive disclaimers of liability found in the banks' Addendum, underscore the need for buyers to have a thorough and extensive professional inspection when purchasing REO property. In some instances, these inspections may need to be more extensive and invasive than those conducted for homes that have been continuously maintained up to the time of closing.
Recently, there have been some court rulings that have placed into question the quality of the banks' title when they recover property through the non-judicial foreclosure process (i.e. by trustee advertisement and sale). Although there is some risk of a bank selling REO property with a flawed title, it is statistically remote. However, the best protection you can have is to obtain a standard owner's policy of title insurance, insuring that title to the property you purchase is marketable. At the time of closing, most banks pay for the issuance of an owner's policy of title insurance to their buyers. Additionally, banks do not normally convey title to REO property using a General Warranty Deed, which is common in traditional non-bank residential sales. This means that beyond the title insurance policy, recourse directly against a bank for selling you REO property with a defective title may be limited. If you are concerned about any of these matters, you should consult an attorney familiar with these issues before making an offer.
You will normally make your offer of purchase on the standard OREF Residential Sale Agreement ("the OREF Sale Agreement"). You should ask your Realtor® to review the form with you before formally making the offer. If a bank accepts your offer of purchase, it will normally present you with an "Addendum" to sign which becomes a contractual part of yourpurchase transaction. Most such Addenda materially alter or eliminate many of the standard provisions contained in your OREF Sale Agreement. They make it very clear that the bank disclaims all liability for any materially adverse conditions in the property and that the sale is AS-IS, with no express or implied warranties. The Addenda may also change some of the contingency time frames provided in the OREF Sale Agreement. Some banks may entertain more than one offer at the same time, and give preference to an offer that was submitted after another one. Lastly, banks frequently prefer to conduct negotiations verbally, through their listing agent. They may decline to issue a written counter-offer or rejection of a buyer's offer. Written agreements or addenda do not normally occur until all parties have agreed upon the terms. Until that time, banks may change or delete previously negotiated terms. This can be frustrating to many buyers of REO properties.
Your Realtor® is skilled in assisting you with locating a desired property, completing the OREF Sale Agreement and related OREF forms, arranging and scheduling service providers such as professional inspectors, ordering title insurance, negotiating with the bank's Realtor®, setting up escrow, and assisting you throughout the closing process. However, your Realtor® is not an expert in property inspections, interpretation of legal documents such as the bank Addendum, or opinions regarding the marketability of title to REO property. For these, and similar specialized services, you should consult a professional inspector, the title examiner identified in your preliminary title report, and/or a qualified real estate attorney. If you are in need of a referral for these, or other, specialized service providers, check with your Realtor®. Although he or she may be able to act as a general resource to you, Realtors® do not endorse specific service providers. You are free to use any expert of your choice, but should always independently check their professional credentials.
Although a bank is exempt from the law requiring that it provide you with a completed Seller's Property Disclosure Statement, it is not exempt from most other state and federal laws. If the bank disclaims liability or responsibility for compliance with any of these laws, you should consult with your own expert to determine whether this may impose any additional liability or risk to you. Your Realtor® is not an expert in these specialized areas. As a buyer of REO property, you should confirm whether the bank selling the property will comply with the following sections of the OREF Sale Agreement, or is legally exempt from doing so: Section 11. WOODSTOVE/FIREPLACE INSERT (If uncertified woodstove or insert is located on the Property); Section 12.(2) SELLER REPRESENTATIONS (Working smoke alarms and carbon monoxide detectors, where applicable); Section 14. PRIVATE WELL (Seller to have well water tested); Section 16. LEAD-BASED PAINT CONTINGENCY PERIOD (Pertains to homes and structures constructed before 1978); Section 28.1 SELLER ADVISORY: OREGON STATE TAX WITHHOLDING OBLIGATIONS; (Applies if Seller is an out-of-state individual or C-corporation); Section 28.2 SELLER/BUYER ADVISORY: FIRPTA TAX WITHHOLDING OBLIGATIONS (Applies if Seller is a "foreign person" under federal law); Section 31.1 LEVY OF ADDITIONAL PROPERTY TAXES (Pertains to seller actions disqualifying the property from a special property tax exemption); Section 31.2 HISTORIC PROPERTY DESIGNATION (Pertains to property subject to special assessment under ORS 358.475). The costs normally absorbed by sellers in traditional, non-bank-owned sales, may not be agreed to when a bank is selling REO property. (For example, if the home utilities have been turned off, you may be asked to pay the cost of turning them on for a home inspection.) If this occurs, and you want to complete the transaction, you may be asked to pay some additional expenses.
Buying Short Sale Property
The following Summary is intended to briefly address some of the practical and legal issues that can arise in a Short Sale transaction. This Summary is not intended to be a complete explanation of Short Sales, does not constitute legal advice, and should not be relied upon in lieu of securing competent legal, tax and consumer credit advice.
The term “Short Sale” is used to refer to those real estate transactions in which the agreed-upon purchase price is insufficient to pay off all of the secured debt on the property (such as mortgages, trust deeds, state/federal income taxes, liens, property taxes or other local assessments) including the costs of closing, such as escrow and recording fees, title insurance premiums, real estate commissions, etc. If the seller is in bankruptcy, a trustee for the seller’s creditors will take control of the sale. In most Short Sales, the seller must secure an agreement from one or more third-party creditors to accept from the closing proceeds something less than the remaining amount of the debt due them. In other words, the debt is “shorted” or reduced. The one thing common to all Short Sales is that the final decision on price and terms of the transaction, as well as the identity of the ultimate buyer, will be in the control of third parties, usually creditors, whose consent to the transaction is required in order for the seller to convey clear title to a buyer.
Since a Short Sale requires approval from one or more creditors who are not parties to the pending real estate sale transaction, the seller’s agreement to sell must be made subject to (or “contingent upon”) third-party consent. This generally means that if the seller is unable to secure the necessary consent (for example, because the creditor refuses to give consent or it cannot be obtained by the closing date), the transaction fails and all earnest money is to be promptly refunded to the buyer.
In Short Sales it is not unusual for a creditor whose consent is sought to insist that other creditors who would be paid from the closing also share some of the cost. They may also insist that the sale price be increased, or require removal of provisions for the seller to pay certain repairs, etc. Some creditors may require an appraisal or independent broker’s price opinion (“BPO”) of the property before making any decision. Thus, in Short Sale transactions, seller and buyer must be prepared for delays resulting from changes to the price, terms and conditions agreed upon in the original transaction, responses from third-party creditors, as well as other events outside of the seller’s and buyer’s control.
In Short Sale transactions, the deadlines for completion of buyer contingencies may need to be suspended pending third-party creditor consent. However, if consent is slow in coming and the buyer wishes to proceed anyway, buyers must understand that there is a risk they could expend their funds only to later learn that the necessary creditor’s consent to the Short Sale cannot be obtained. Normally, buyers have no recourse for recovery of these expenditures.
Since most third-party creditors will want to secure the highest and best offer for the property, they may insist that it remain on the market, notwithstanding a pending transaction. As a result, a creditor may withhold final consent until they have had an opportunity to compare one offer with other potential offers that may come in the future. In some Short Sales, a creditor may refuse to give consent to a pending transaction because they want the seller to accept another offer, or potential offer, with a better price or terms. As a result, the entire Short Sale process may involve a significant risk of delay or failure.
Short Sale transactions can be complicated and time consuming. They raise important issues, especially for sellers, including income tax implications, liability issues for unpaid mortgage indebtedness, credit rating issues, bankruptcy and other legal issues, all of which can affect the ultimate success of the transaction. Your real estate broker is not an expert in these areas. Buyers are strongly encouraged to secure additional competent professional advice before entering into a Short Sale transaction.
Oregon Bay Properties, LLC does not give legal or financial advice. Information provided is not a warranty of any kind and all information should be verified.