REO Confusion. Please help!

5 Replies

Hello,

I made an offer on a REO with 20% down and the rest is being financed. I was told that no inspection would be possible after accepted offer. My loan officer qualified me for a renovation loan to fix whatever is not in HUD minimum property standards.

The loan officer told us to bring a home depot person (because they won't charge for their inspection) to see how much work needs to be done and she would qualify me for additional renovation funds for the home. She also told us not to get an inspection because we don't have an accepted offer, it would be wasting our money if our offer was not accepted. However the listing agency specifies that no inspection is possible after accepted offer. We only estimated the cost of repairing the house, however the house has no water/electricity/heating. We plan for the worse case scenario for fixes and qualify for renovation funding from bank.

The contract was sent to our lawyer. A friend of mine told me because we don't have an accurate figure for fixing the home, the appraisal might come up short. He said that if the appraisal comes up short after formal contract is signed we are going to lose our down payment unless we can come up with all cash to purchase the home.

Is there anyway to protect myself from losing my down payment if I go through with the contract? I thought contracts were contingent upon the buyer being able to obtain financing.
I also thought in a renovation loan the bank will appraise the house as is, and appraise it after the renovations are done.
Or is my friend completely wrong about this?

Any help would be greatly appreciated.

Hi Johnny

Not a lawyer or anything, just my opinion, so take it fwiw.

“I made an offer on a REO with 20% down and the rest is being financed.�

If the offer stated a financing contingency, it should state the terms, yada-yada-yada. As a REO purchase, you should have also had to include a proof of funds, such as a pre-approval from your lender and/or bank statements showing you have the down payment available. If the financing contingency of the offer is correctly written, then later, if the appraisal comes up short, you will likely have options to consider and you should have sufficient grounds to back out and recover your earnest money. You need to hear this from your lawyer. There are some (HUD) where this doesn’t apply.

“I was told that no inspection would be possible after accepted offer. “

REO, or any other property being sold “as-is� will normally not allow an “inspection contingency� where the buyer can back out and recover their earnest money if there are surprises on an inspection. This does not prohibit an inspection after the offer is accepted, it simply means the buyer cannot use that inspection to bail out and recover the earnest money deposited. Any inspection then, is simply for your information only.

“My loan officer qualified me for a renovation loan to fix whatever is not in HUD minimum property standards. The loan officer told us to bring a home depot person (because they won't charge for their inspection) to see how much work needs to be done and she would qualify me for additional renovation funds for the home. “

This should have been done prior to the offer being written. Know all the costs and get adequate financing approved prior to writing an offer on a REO. As you should already realize, “as-is� means just that, as it is, no fixes or re-negotiating price due to any defects later found in the property. Don’t offer to buy if you don’t know what it’s going to take. Remember, your "price" isn't the contract price, it's the cost of acquiring plus renovation. How can you make an offer without knowing all the costs?

She also told us not to get an inspection because we don't have an accepted offer, it would be wasting our money if our offer was not accepted. However the listing agency specifies that no inspection is possible after accepted offer. We only estimated the cost of repairing the house, however the house has no water/electricity/heating. We plan for the worse case scenario for fixes and qualify for renovation funding from bank."

Jeez-louise. Where do I start? Mind you, this is my opinion only, but, find a new loan officer. She’s clearly put her loan commission ahead of your interests. If you’re looking at a REO property with no water/electricity/heating and she’s saying don’t get an inspection, she must think you’re an all day sucker. Again, as-is means just that. Caveat emptor means buyer beware. Are you really considering such a major purchase without knowing what could be wrong? Paying for an inspection isn’t a waste of time or money if that $300 or so keeps you from buying an over priced financial nightmare.

“The contract was sent to our lawyer. “

Your lawyer, or the banks? Might be good advice to get one just for you, as opposed to “sharing� the banks lawyer.

“A friend of mine told me because we don't have an accurate figure for fixing the home, the appraisal might come up short. He said that if the appraisal comes up short after formal contract is signed we are going to lose our down payment unless we can come up with all cash to purchase the home. “

Depends upon how the offer is written. With a properly written financing contingency you will have options. See the financing contingency notes above. It’s always a risk today. Make sure the contingency protects you for this. Talk to your lawyer. Oh, did I suggest “your� lawyer?

“Is there anyway to protect myself from losing my down payment if I go through with the contract?�

This doesn’t make sense. If you go through with the contract, your earnest money (not down payment) will become part of the down payment on the closing statement. If you back out, it will depend upon whether you have sufficient reason to, per the contract. If it is because of a contingency in the contract, you should get it back, if you back out simply because you got buyers remorse or cold feet, then no.

“I thought contracts were contingent upon the buyer being able to obtain financing.
I also thought in a renovation loan the bank will appraise the house as is, and appraise it after the renovations are done.�

Pretty much correct. So, my question to you is, how will the appraiser know what it will need or cost to fix the place unless someone tells them. An appraiser is not a home inspector or contractor, and not particularly skilled in estimating repair costs, especially if the defect is hard to detect. My suggestion is to get that inspection, get a couple contractors to bid on repairs, get the financing approved, make the offer and when the appraiser shows up, make sure they get a copy of the inspection and bids. Seem like a reasonable, logical, safe approach, doesn’t it?

“Any help would be greatly appreciated. “

Hope this helps. Don’t take anyone else’s advice. Get your own lawyer. Listen to what everryone says, question, learn, understand, get a second opinion if you are unsure, and make up your own mind. I think you got bad advice on the inspection. Bad advice to make an offer without better knowing what is wrong with the property and cost to make repairs.

If the offer has actually been submitted to the seller, and you now want to get that inspection, talk to your lawyer or Realtor real quick. You should be able to rescind the offer without penalty (get your EMD back) up until the time the seller actually accepts. Again, don't know where you are, or what the law is where you are. Ummmm. See your lawyer.

Good Luck.

Ralph,

Thanks for the advice. I just got back from my lawyer and we had several problems with the contract. Most of these problems we can live with except for the financing contingency.

My lawyer doesn't like the financing contingency. The financing contingency states that once we obtain a commitment letter, and for any reason the bank decides not to go through with the financing during the closing we will lose our Earnest Money.

Is this common among REO contracts? If it is, how do you guys cope with this danger?
The bank has agreed to do the appraisal before commitment letter is issued, but what about other risk?

Any help would be greatly appreciated.

That was a great detailed reply from Ralph S !

My 2 cents: I would start over. If you can withdraw your offer now without any loss, I would do it. Most likely there isn't anyone waiting for the property at the price you offered since it sounds like you may have offered too much.

Before submitting any offer to a bank on an REO you MUST do your own due diligence. You should have a buyer's agent because it sounds like the listing agent is just letting you dig yourself in deep.

Your agent can meet with you and a contractor who can give you a realistic retail cost of the rehab. THEN you decide how much to offer.

I never put down more than $1000 earnest money which is usually held by my agent or if the listing agent agent insists, they can hold it until the contract is ratified by all parties. But it shouldn't matter so much because you've already done your homework and you know you want the property.

You will also need some form of pre-approval or proof of funds. I use a letter from a private lender or hard money lender.

You should always be able to use the financing contingency as an escape clause. I've had several properties go to underwriting and then not be approved for the amount I needed. I told the listing agent, they returned my earnest money, I sent then a release of contract and that was it.

Remember, if you're uncomfortable with the deal, maybe you shouldn't do it. There are a TON of REO's out there, you'll find one that makes sense for you.

Good Luck!!!

REIWizard,

When we first visited the property I went with contractor who gave me a reasonable estimate of what it cost. It was a true inspection from someone certified. I can back out of the deal now since no formal contract has been signed. The earnest money has to be 10% per the contract. They will not budge on this amount. I've got a pre approval from a lender already.

The formal contract states that once a commitment letter has been obtained the financing contingency disappears. And the loan can not be changed from what the commitment letter says.

Right now I am uncomfortable with this deal because there is so much risk involved.

I've heard of "Dry Closings" where the funds from the bank were not wired to the title company, but these were instances where the lender was a time zone or two west of the closing, and the closing was scheduled too early in the morning. The only other item I can think of is if the closing is delayed, and the financing expires. I once ran into that wall when title issues arose on a REO I was buying. The foreclosing lender issued a quit claim deed to Freddie Mac, who we were buying from and opps, the rocket scientists they had for lawyers mixed up Grantor and Grantee, so instead of QCD from Lender to Freddie, the QCD read Freddie to Lender. Freddie was selling what it only thought it owned. We had already been delayed when they discovered this and it took another month to clear that one up, and we were bumping into the deadline on our financing.
On another REO we offered but didn't purchase, the appraisal came up just a couple thousand short. Our lender would still loan and issue a commitment letter if we wanted to make up the difference. It really was just a couple thousand, and everyone pretty much agreed the appraisal was just too low. See my comments about appraisers where repairs are needed. I think in they just conservative when the property is really distressed. It was, like Johnny's, a real fixer upper. We decided to bail, and instead of issuing a commitment letter for the reduced amount, asked the bank to decline the financing, which they did, and we got our EMD back.
On another REO, we lost our first offer when the bank accepted someone elses. The first buyer got cold feet when the termite and moisture inspection turned up water damage under one of the bathrooms (in the crawl) and estimated a $4K repair bill. They backed out, losing their EMD. I had actually gone into the crawl space before our first offer and knew that repairs had recently been made, just in a shoddy manner. I contacted our agent and told her to look at the last two sales and see who had done the repairs. This was late '07 and she found out that repairs, and a clear inspection had been done in '05. We made a second offer, and the seller required we accept up to $4K in repairs for the moisture damage. When it came time for our inspection, we used the same company that made the '05 repairs, told them quite clearly that they had made the repairs in '05, and we expected nothing less than a clear inspection. We got it. We had planned to, and have since, remodeled both baths, anyway,
After moving quickly and putting in an offer on another REO, my DD included getting a copy of the plat from the city. We noticed a difference between the plat and the street that came to the property. The plat showed a 90 degree turn, and straight streets, and property lines perpendicular to the street. Given the actual corner was not 90 degress, nor were they very straight, and the fences were not perpendicular to the street, we very quickly ordered a survey ($450) that revealed that the property line was actually on the other side of the road, the road cut across the property and the house at the end of the road did not have a recorded easement. On top of that, the surveyor was unable to verify whether the street was public or private. Yeah, we yanked that offer. After several discussions with the city, the road proved to be public, and we resolved the legalities of the road across the property, and put in another offer and bought the property.

You can't eliminate all risk. You can, in many cases, mitigate and manage the risk to protect yourself. A distressed REO carries more risk and requires greater care and at the same time, the seller doesn't want to see those pesky "get out of jail free" contingencies. You really have to do all that up front, before the offer. It sounds like Johnny, you have a lawyer on your side who is looking out for your interests and informing you of the risks. Evaluate and decide what's best for you, your own tolerance for risk, and how well equiped you feel you are to deal with the uh-ohs and oh-s__ts!.

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