In this chapter:

• When all alternatives are exhausted: foreclosure

• A closer look at foreclosure sales

• When the property fails to sell at the foreclosure sale: REO

5. Foreclosed and Real Estate Owned (REO) Properties

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• When refinancing, loan modification or short sale doesn’t work, only one option: foreclosure

• Results in forced sale of property and eviction of homeowner

When All Alternatives Are Exhausted: Foreclosure

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

Generally takes less time than judicial foreclosure

Borrower preauthorized the sale of the home upon default in loan document

Non-Judicial Foreclosure

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• In judicial foreclosure (loan instrument is mortgage):

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

Judicial Foreclosure

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Terminology: Notice of Default

• Official notice to borrower that they are in default

• Formally begins the process

• Outlines reinstatement period

• Lenders differ on when they send

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Terminology: Reinstatement

• Time stipulated in NOD when borrower can make required payments and bring account into good standing

• Can vary by both lender protocol and state statues

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Terminology: Notice of Sale

• After Notice of Default (NOD)

• Borrower has not reinstated

• After judgment has been entered (in judicial states)

• Timing is state specific – often 90 days prior to sale date

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Terminology: Foreclosure Sale

• Commonly an auction or sheriffs sale

• Could sell to a ‘buyer’ or could go to bank

• Formal process whereby owner is deprived of their asset

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Terminology: Redemption

• Time after foreclosure sale when the owner can redeem the property

• State specific as to:• Length • What needs to be paid back• Whether there even IS a redemption period

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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

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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

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Buyer Considerations

• Buyers may not receive clear title

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

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Why the Lender Gets the House

• Minimum bid lender will take is usually more than value of property

• Investors won’t pay it• Home buyers won’t either• Pool of investors diminishing

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Listing REO Properties

• Know what you are agreeing to

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

• Agents should NEVER take REO listings without permission of their broker

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Listing REO Properties

• Occupancy check• Owner – tenant - ???• Verify lease• Proof of tenancy• May have to negotiate

‘keys for cash’• Complete trash out• Photos – lots of them

• Hiring and paying:– well and septic– re-keying property– winterization– de-winterization– snow removal– lawn care– Utilities

• Reports – reports and more reports

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Finding & Showing REO Properties

• Use the following search terms:

> Bank owned

> Lender owned

> Foreclosure

> REO

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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

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Unsupervised Access

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Code of EthicsREALTORS® shall not provide access to listed property on terms other than those established by the owner or the listing broker.

Writing Offers on REO Properties

• Lender’s internal cost to foreclose can be significant

• Costs accumulate as property goes unsold

• REO transactions are investment driven

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Writing Offers on REO Properties

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

> Buyer makes offer based on market value

> Buyer has been pre-approved for financing

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

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Writing Offers on REO Properties

> They agree upfront to “as-is” transaction They do not have any home sale or home

close contingencies Some lenders require pre-approval by

their representative Some are preferring to do the financing

themselves

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Writing Offers on REO Properties

Buying “as-is” does not eliminate right to inspection period

Buyer should have: Home inspection Mold inspection Take photos

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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

• Asset manager will generate addendum for buyer to sign

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Negotiating the REO Contract

• Bank/asset manager determines how subsequent offers will be handled• Until addendum is signed by bank they can

entertain other offers and could accept a different one and reject the first

• Some do not entertain second offers at all

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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

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Addendum Issues

• Alter inspection period

• Modify seller warranties

• Change financing provisions

• Impose monetary penalties for buyer’s failure to close

• Mold and other environmental disclaimers

• Limit seller’s liability84

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

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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

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Closing Dates and Per Diems

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

• Makes no difference if it was the buyer’s lender that caused the delay

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