REO FAQ
(Frequently Asked Questions)
These are not intended to take the place of the advice that should be obtained from proper legal, tax or other professional. If you have other questions or concerns, please consult your attorney, tax professional or other qualified professional you trust.
Q. What exactly does REO stand for?
A. R-E-O stands for Real Estate Owned. This is what banks and lenders call the properties they now own due to completion of a foreclosure on a loan they held on that property.
Q. Why must I get preapproved with another lender prior to having my offer submitted?
A. The owners of the properties want to verify that buyer’s who submit offers on their properties are qualified to purchase the property. In addition, the owners of these properties are also in the business of making loans and many times they offer better rates and lower fees than other lenders in the marketplace. Because of this, they want the buyers of their properties to see just how competitive they are.
Q. Will my offer be submitted to the bank if I do not get a pre-approval letter from their selected lender or provide proof of funds, doesn’t the law say that the broker must submit all offers?
A. While the law states that the broker must submit all bonafide offers the seller can decide what they consider a bonafide offer. They give specific instructions to their listing brokers that only offers that are submitted with preapproval letters from their retail lending offices are considered bonafide. In addition, they do not consider cash offers submitted without proof of funds as bonafide.
Q. Do I have to get my loan with the seller’s retail lending offices?
A. No you do not. You can obtain your loan from any lender you choose. Please note however that should your chosen lender fail to close the escrow on time you may be subject to per diem penalties as noted in the purchase agreement addendums.
Q. Does the seller have to pay my appraisal and other fees associated costs to close the transaction?
A. No, the seller is not required to pay all of your closing costs associated with the transaction. With that being said, there are different loan programs such as FHA and VA where there are fees that cannot be paid for by the buyer and if the seller would like to offer their properties for sale with these terms, they must agree to pay these non-allowable fees.
Q. Why does it take so long to get an answer from the seller on our offer?
A. The “seller” as you know it might not actually be the final say so in accepting your offer. Many times the listing agent has contact with the servicer of the loan or an REO management firm who has been contracted to dispose of the REO property on behalf of the investor or owner. The REO management firm and/or servicer must often time get approval from the investor or owner of the property prior to final acceptance of the offer.
Q. What exactly is Highest and Best Offer?
A. A request of Highest and Best Offer is made of buyers when there is a multiple offer situation. It is then incumbent upon the buyers who have already submitted an offer to decide whether or not to increase their price, alter their offered terms or make other changes to try and make their offer more competitive. The buyer may also opt to not make any changes to their offer and request that it be reviewed as originally submitted. It is advised to submit your highest and best offer initially as some sellers do not engage the highest and best offer process and will negotiate with the one they deem highest and best from the beginning of the process.
Q. How much time do I have to respond once the seller has requested “highest and best”?
A. Most sellers allow up to 24 hours for the buyer to respond to the request for “highest and best”. However, it is important to note that you are in this situation because there are other offers competing against you for the same property. You should respond as quickly as possible and get your highest and best submitted and make sure the seller knows you are still interested in purchasing the property.
Q. Why does the seller get to pick the escrow company?
A. The seller does not have the final word on escrow and Title Company. In most cases there is a clause in the seller’s addendum that gives the buyer the opportunity to select the escrow and Title Company provided they pay all the charges of title and escrow.
Q. Why do I have to sign the bank addendum?
A. The old rule about “He who has the gold.” applies here. The banks own these properties. They know that there are many buyers who want them and as a result, they dictate many facets of the transaction. The best way to avoid a bank addendum is to avoid buying a bank owned property as they will not sell to anyone without it being signed by all parties.
Q. How much should I put up as an earnest deposit?
A. Most banks use the rule of thumb of 2% of the purchase price or $1500, whichever is higher. We generally recommend as high as the buyer feels comfortable with provided that it meets the seller’s minimum amount. Stronger deposits often signal stronger buyers in the mind of the seller’s representative.
Q. I have submitted many offers on many different properties and not gotten an accepted offer yet. What gives?
A. Sounds like a little bit of bad luck seasoned with a potential lack of market knowledge. It is recommended that buyers work with an experienced agent who has a history of getting offers accepted for other buyers of REO properties.
Q. We have been told that the seller wants us to submit a Highest and Best addendum for an offer we have in on an REO property. Our agent told us to offer much more than the list price and that of the seller accepts the offer and the appraisal comes in lower, the seller has to drop the price we pay to the appraised amount. Is this true?
A. Many agents and buyers have used this strategy in the past and the sellers are wise to this practice. In most agreement and addendums issued by the sellers of REO properties is a clause that states the buyer agrees to pay the difference between the sales price and the appraisal in cash at closing. So in other words, if you reach an agreement with the seller to buy a property listed at $150,000 for $160,000. The appraisal is completed at $155,000. You will be responsible to bring $5,000 additional funds to closing or risk losing your earnest deposit for failing to close the transaction. Because of this clause, this strategy may not be the best choice for many buyers.
Q. I have seen the same property sitting vacant on my street for the last 12 months. Everyone says it is a foreclosure, but the property just sits and doesn’t appear to be for sale. How long will they wait before placing it on the market?
A. This property may be empty and not yet owned by the bank because the foreclosure has not been completed. The foreclosure may have been completed and the seller has other issues such as a cloud on title, personal property evictions or other internal issue. On another note, just because a property looks vacant, doesn’t always mean it’s vacant.
Q. I have called the offices of many listing agents of these bank owned properties and I never get to actually speak with the listing agent, why is that? I always get stuck with an assistant or someone they call a Buyer’s Specialist.
A. Believe it or not, handling the responsibilities of bank owned properties is a big deal. There are many things that are not generally associated with listing properties for sale in a traditional sense that must be completed with REO. These tasks keep agents of REO properties very busy and does not generally allow for deviation from the tasks at hand. As a result and in an effort to make sure buyers who call the offices for information get the help they need, these agent hire other agents who work well with buyers to help them with the questions they have. It is not a sleight on the buyers who call; it’s more a factor of who much work has to be done for the REO seller and how little time there really is in a day to get it done.
Q. What is the Buyer Information Form and why must it be completed?
A. When an offer is received and subsequently submitted to the seller, there are bits of information that must be submitted with the offer that is not included in the offer to purchase document. Things like date of birth, whether or not a property will be owner occupied and buyer’s email address are important to the submission. Many times the REO seller wants to make contact with the proposed buyer ask some questions about motivation and other issues to ensure information they have been provided by the agents is true. It is recommended that all the information requested on this form be complete and accurate.
Q. Why am I being asked to sign an Offer Submission Provisions Form?
A. After many years of listing and selling REO properties, we have found that many proposed buyer were not properly informed as to what their responsibilities were as it relates to the REO property they were entering into an agreement to purchase. We created this document at the insistence of our clients to educate buyers and their agents about many aspects of the REO purchase. Please make sure you read and understand how each portion affects you and your desired purchase.
Q. The property I want to buy is located within a Homeowners Association. Will the seller disclose all the documents and fees as required under the law?
A. Yes the seller will be in compliance with the Nevada Revised Statutes. You will most likely receive the required disclosures in the form of an email attachment. Please confer with your agent about how you would prefer to receive these disclosures.
Q. The property I want is in decent condition, but the appraiser or inspector has indicated that there are repairs needed. Will the seller or bank make the needed repairs?
A. Not likely. When you entered into the agreement to purchase the property, you signed the bank addendum. In this addendum, you agreed to take the property in “As Is” condition. This means that unless the property’s condition has changed dramatically since you wrote your offer that condition is how you will take the property in at the close of escrow. Most sellers of REO will not make any repairs because of an appraisal or inspector’s report.
Q. I want to hold title in my LLC or Corporation, can I write the offer from my business entity?
A. Of course you can. However, when this is done, most of the sellers require copies of the corporate documents. A cleaner method employed by many buyers is to buy and take title to the property in their own name and transfer the property into the name of the business entity after the close of escrow.
Q. I think my brother would really like to buy this house I saw today. Can I put my name on the contract and negotiate the transaction. Then when I get the seller to accept just transfer or assign the transaction to him?
A. Not usually. Sellers of REO properties will not allow assignment of the purchase agreement they negotiated with a different buyer.