The Difficulties of Buying Bank Owned (REO) Property
I recently came across a blog by Camile Baptiste titled 3 Advantages of Buying Bank Owned Property (REO) (see Camile’s Blog HERE). I tweeted it out and said that it is totally false (follow me @dkblattneratty). Maybe it isn’t totally false, but there are numerous reasons not to buy REO property. Banks, as sellers, are extremely difficult to deal with. Let me briefly enumerate my observations.
- Banks typically attach a multi-page addendum to the standard from contract used in a locale. The addendum, of course, disclaims any liability for anything that could possibly be wrong with the property. OK, “AS IS” is “AS IS”. But the addendum changes customary contract provisions including times for inspections, responsibility for closing costs and rights regarding title.
The title issue can be a big one. In most areas in Florida, the buyer selects the title agent. Banks, following foreclosure, like to control title. In a recent REO transaction I handled for a buyer, the bank’s title company provided the title commitment and set the closing date. However, the title commitment showed that the foreclosure was not complete and a subordinate lender was not properly foreclosed. Therefore, the property had to be re-foreclosed. Because we couldn’t control the process, it was difficult to first convince the title company and then the bank that re-foreclosure was required. They wanted us to close! Then, we had no ability to coordinate with the bank to assure that the case was progressing and the re-foreclosure took over 18 months.
- Banks don’t negotiate – anything. Their form is their form. The deal is the deal. If there is a problem later, they don’t negotiate. During the same transaction, while waiting for the re-foreclosure, Hurricane Irma hit South Florida. Though the contract was “AS-IS”, it also provided that seller shall maintain the property and deliver it in the same condition as of the Effective Date. Additionally, there was a casualty/risk of loss paragraph. Hurricanes were covered under this paragraph and seller had an obligation to spend up to 1.5% of the purchase price to repair damages, including removal of debris and trimming of trees following a casualty. Of course, there was extensive damage and the purchase price was just under $1,000,000. The bank did almost no clean up or repair. The roof was severely damaged and had extensive leaks, yet the bank didn’t even put a tarp on the roof to stop the growing water and mold damage to the interior. The pool pump became inoperable creating a green cest-pool. A horse stable on the property was demolished and not cleared or re-built. Fences were missing and trees uprooted. Notwithstanding, the bank only agreed to a closing credit of only $10,000.
- Banks don’t close or make decisions as quickly as advertised. When a contract is submitted or a decision is required, the real estate agent will tell a buyer that the bank will respond immediately. That is never the case as approval is not obtained locally. An out of town asset manager makes the decision. The asset manager has dozens of files on his/her desk and responds when he/she can, regardless of contractual deadline. If buyer’s lender requires information or a signature, the asset manager doesn’t move any more quickly. There is no “professional courtesy” afforded from the selling bank to the new lender.
- REO property is always in worse condition than advertised or than you observe. The foreclosed owner didn’t care for it and in fact, purposefully damaged it on the way out. Bank will do the absolute minimum to maintain it while it owns it and will do nothing to repair it. They hire local property managers or real estate agents to do these things and the local managers/agents spend as little as possible to maximize their profits under their contracts.
- Anti-flip provisions in REO sale contracts limit buyers. A large percentage of buyers of REO properties are flippers. Many REO sale contracts restrict the buyer’s ability to flip. These restrictions range from 60-180 days.
- Banks and asset managers are usually located out of state and therefore, unfamiliar with local law and custom. This causes additional delay and confusion.
These are but a few of the difficulties in buying REO property. Though the price is often attractive, these and other difficulties can cause a buyer time, money and lost opportunities which might offset the favorable up front pricing. Think more than once before buying from an REO.