In this chapter:

• When all alternatives are exhausted: foreclosure

• Forced sale of property• Redemption• When the property fails to sell at

foreclosure sale: REO

5. Foreclosed and Real Estate Owned (REO) Properties

5-1

When All Alternatives Are Exhausted

5-2

• When refinancing, short sales, and/or loan modifications don’t work, only one option:

> Foreclosure

5-3

• State foreclosure laws determine:

> How proceedings will take place

> Length of time to complete proceedings

> Outcome

State Foreclosure Laws

5-4

• In judicial foreclosure (loan instrument is mortgage):

> Foreclosure or court-ordered action is typically used to execute foreclosure proceedings

Judicial Foreclosure

5-5

• In non-judicial foreclosure (loan instrument is deed of trust):

> Generally takes less time than judicial foreclosure

For an overview of judicial and non-judicial processes, see Figure 5.1.

Non-Judicial Foreclosure

5-6

Forced Sale of Property

• Foreclosure requires forced sale of property, commonly through an auction

• In some states, forced sale happens via a trustee sale

5-7

A Closer Look at Foreclosure and Sheriff’s Sales

• Listed among legal/judicial notices in local newspaper

• Scheduled sale of property is published for specific number of weeks prior to sheriff’s auction/sale

5-8

Buyer Considerations

• Opportunity for property inspections can be negligible or extremely limited

• Buyers may be responsible for evicting occupants

• Buyers may be responsible for paying outstanding liens

5-9

Buyer Considerations

• Buyers may not receive clear title

• Buyers may be impacted in states that offer borrowers the right of redemption

5-10

Redemption

• Redemption period: Right of borrower to recover a property after foreclosure sale

• Period varies from state to state

5-11

When Property Fails to Sell at Auction

• When foreclosed properties don’t attract bidders at auction, the property is considered real estate owned or REO

• REO means ownership of the property or asset has been involuntarily transferred to the lender

5-12

Listing REO Properties

• Know what you are agreeing to

• Verify whether or not your E&O insurance covers activities required for REO listings:

> Hiring and paying service providers and contractors

5-13

Listing REO Properties

• Note: Many banks and/or asset managers are requiring deposit of earnest money at time they verbally accept buyer’s offer

• This is often in violation of state license laws and needs to be explained to seller and modified in listing agreement

5-14

Showing REO Properties

• Use the following search terms:

> Bank owned

> Lender owned

> Foreclosure

> REO

5-15

Safety Issues

• Know who your buyers are prior to showing

• Do not meet buyers at property for the first time

• Many REO properties have no electricity; showing them can be hazardous

5-16

Don’t Allow Client Unsupervised Access

• Serious error is to give buyer client access code or lock combination to enter these properties without licensee

• In many states this would be considered violation of license law and/or MLS rules

5-17

Writing Offers on REO Properties

• Lender’s internal cost to foreclose can be significant

• REO transactions are investment driven

5-18

Writing Offers on REO Properties

• Buyer’s chance of offer being accepted greater when:

> Buyer makes offer based upon market value

> Buyer has been pre-approved for financing

> They ask for closing date that is sooner rather than later

5-19

Writing Offers on REO Properties

> They agree upfront to “as-is” transaction

> They do not have any home sale or home close contingencies

5-20

Negotiating the REO Contract

• Buyer’s agents should call listing agent for instructions on presentation of offer

• Listing agent then submits offer to asset manager

5-21

Counteroffers and Addenda

• Counteroffer is handled through addendum, which is sent to listing agent from asset manager, who forwards it to buyer’s representative via fax or e-mail

• When offer is accepted, listing agent contacts buyer’s representative

5-22

Addendum Issues

• Altering inspection period

• Modifying seller warranties

• Changing financing provisions

• Imposing monetary penalties for buyer’s failure to close

• Containing mold and other environmental disclaimers

• Limiting seller’s liability

5-23

Limited Property Disclosures

• With REOs, property disclosures may be limited

• If buyer client refuses to schedule property inspection, buyer’s rep should ask client to sign an acknowledgment of waiver of inspection

5-24

City POS Inspection

• Some cities require a point of sale (POS) inspection to assess safety, soundness, and security of property

• Customarily, buyer corrects violations unless seller fixes them

• Many cities require escrow fund to cover costs of repairs

5-25

Final Walkthrough

• Final walkthrough assures same “as is” condition as when offer was presented

• Listing agent and seller will have photos of property when it was listed

• Buyer’s representatives are encouraged to take photos at time of purchase contract

5-26

Closing Dates and Per Diems

• Asset managers prefer closings to take place at the end of the month

• Most sellers charge a daily penalty for every day the buyer is late in meeting the contract closing