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 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