Every foreclosure sale is different. Below are typical things to expect when buying a foreclosure. We help walk you through this process.
Foreclosures are homes that have returned to the bank due to non-payment. Other names you’ll see for foreclosures are REO (Real Estate Owned), REPO and Bank-Owned.
What to Expect When Purchasing a Foreclosed Home:
Making an Offer
Prequalification
Banks are more comfortable knowing that the buyer is financially able to close the transaction. You may see a listing that requires prequalification with a specific lender before an offer will be presented to the seller. Generally, it will be the same bank that owns the home. Pre-qualifying with a particular lender does not compel the buyer to use that lender for the actual loan.
Closing Costs
There is no one standard for allowable closing costs in REO transactions. Fannie Mae and Freddie Mac have different allowables, which can vary greatly from property to property. This should be taken into consideration when writing the initial offer and reviewing any counter offer or addendum. You should always submit the best offer you can.
Multiple Offers
Some, if not most, REO properties will have multiple offers within days of listing. You should prepare for the possibility that your offer will be one of many, and buyers should make their highest and best offer up front. As your buyer’s agent, we have the right to inquire whether there are other offers on the property. However, the listing agent must have authority from the client to disclose the existence of multiple unaccepted offers. We may or may not receive that information. Even then, the listing agent may or may not disclose the number of other offers, their terms or conditions.
Presentation of Offers
Most REO asset managers use an Internet-based contract management system or portal. The listing agent will input the essential terms of the buyer’s offer into the system for the seller’s review. Generally all bona fide offers will be presented to the seller as long as the portal is open.
Note: if the seller requires a Multiple Offer Disclosure form, the form must be returned signed by the buyer before the offer is presented.
Entities; Adding Buyers
If the buyer anticipates purchasing the home in the name of an entity (for example, a trust or LLC), or wants to add another buyer, this should be disclosed as soon as possible so documents will be prepared in the appropriate name(s). Otherwise, the transaction could be delayed significantly. In addition, the name(s) on the loan prequalification should match the offer. Please note that some Banks will not allow this.
Responses; “Reasonable Time”
The listing agents have no control over the seller’s response time and can never guarantee a time frame. Each asset manager is different. The current market is in a period of high foreclosures and response times are generally longer. Sometimes the listing agent will have an answer in a few days; sometimes it takes a week or more. If it is a multiple offer situation, time frames can be extended. Buyers should exercise patience during this time.
Written Rejections
Buyers are entitled to a written rejection. Some asset managers sign written counter/rejections, but it is very rare. Expect only a fax or email from the listing agent conveying the seller’s decision.
Getting a Contract
Multiple Counter Offers; Highest and Best
In many situations the seller will make multiple counter offers and/or a request for the buyers’ “highest and best” offer. It is your option to respond to such a request; you should only offer what you feel comfortable with and are qualified to purchase.
Counter Offers and Addenda
In every REO transaction, you can expect a form counter offer (sometimes styled as an “addendum” but serving the function of a counter offer nonetheless) which overwrites numerous provisions of the offer (purchase agreement) and inserts entirely new provisions not addressed in the purchase agreement. Both the agent and buyer should carefully read and understand every provision of the counteroffer or addendum. Very important topics are often addressed:
- when escrow opens
- when due diligence begins and how long it lasts
- when loan approval is required
- what the penalties are for not closing on time.
If the asset manager crossed out and initialed any portion of the purchase agreement, the buyer should likewise initial those provisions, to show they understood the provision was rejected or replaced. Typically, the asset manager will not make a final acceptance or sign anything until the buyer has returned all seller-required counter offers or addenda.
Verbal Responses
Very often, the asset manager will direct the listing agent to work with one offer to the exclusion of all others. At that point, the “successful” buyer does not have a contract! Until the asset manager actually signs the purchase agreement and any addendum or counteroffers, there is no contract. This means that, during the time between verbal acceptance and signature (which can take days or weeks), the seller is at liberty to accept another offer because it does yet have an actual contract with the buyer. Another reason to carefully read and understand all
counter offers and addenda: some timelines (such as due diligence) may start on verbal acceptance.
Due Diligence
Inspections and Utilities
Even though REO properties are generally sold “as is,” the buyer is generally still entitled to a due diligence period for inspections and other inquiries into the property. Each property is different when it comes to the availability of utilities. Most asset managers are willing to work with buyers to turn utilities on for some period to allow inspections and appraisals.
Repairs
REO properties are being sold “as is”. Asset managers cannot guarantee that any repairs will be made in the event there is an issue with the appraisal or home inspection.
Closing and Beyond
Extensions
In today’s lending market, lenders are often taking additional time to finally and fully approve
the buyer’s loan. If an extension is sought by the buyer, you should expect a request to release earnest
money, a per diem cost or some other demand from the seller. The asset manager’s counter offer
or addendum may address this issue.
Moving In
As in any sale, you will be able to move in once the sale has recorded. Early vacancy is not permitted for any reason with foreclosed homes.
Keys
Typically, the buyer is responsible to have the home re-keyed before moving in. The buyer should be prepared for this and have a locksmith ready. Note: This is also a safety issue for the buyer, since many people may have had access to the property with a master key.
Other items such as gate transponders, garage remotes and mail box keys are typically not available from the seller of an REO property. The buyer will be responsible for obtaining replacements from the appropriate entity such as the homeowners’ association or U.S. Post Office.
