Foreclosures 101 (Part 1): What You Need to Know and Do Before You Purchase a REO

So, you have been saving your pennies and see all these great deals on foreclosure or REO (Real Estate Owned) properties and maybe even spoken to a Realtor about looking at a few. Before you take the plunge, it’s very important that you educate yourself in REO sales so that you know what to expect during your journey!

Here’s a Makaha Valley Towers REO (MLS# 1202164) can be yours for $80,000

Today, in Part 1, we’ll start with what you need to know and do before you even start looking. Oh no! Just took the wind out of your sails with that, now didn’t I? Trust me, preparation is KEY if you decide to purchase a foreclosed on property. You’ll be glad that you prepared yourself in the long run. These tips and steps will make your transaction go much smoother.

Not all of the issues listed here occur in every REO transaction. Many proceed relatively smoothly. However, it is important that you approach these transactions forewarned and fully informed. I’m not trying to scare you, but knowing up front about potential problems, or what could happen, will really help you.

Things to Know Before You Purchase

Keep in mind that the seller of these properties is not an individual, but a bureaucracy. Decisions are made by several different individuals under the advice of counsel. Everything is policy driven and guidelines are generally hard and fast. This type of transaction requires a large dose of patience! 

Therefore, please be advised that:

As mentioned above, a REO is a sale by committee and moves very slowly. Very little happens as scheduled. Closing dates may far exceed those defined in the Purchase Contract. Buyers should not plan on moving in on the day set forth in the contract, or moving in at all until certain benchmarks are achieved (I’ll explain those later – in Part 3).

REO Sales Are Entirely “AS IS”

It is important to note that, generally, REO sales are entirely “AS IS”, with no representation implied or expressed. In an overwhelming percentage of cases, the sellers do not negotiate repairs, credits, or purchase price as part of the C-51 contingency. 

Therefore, when you submit your initial offering price, you should be prepared to accept the property “AS IS” at that price. If you are uncomfortable signing an “AS IS” addendum, it’s probably best not to make an offer on a REO property.

Delivering Clear Title

The fact that the property was acquired through foreclosure often creates deficiencies in title, which usually do not become evident until there is an attempt to transfer title in a subsequent sale. Delivering clear title is a condition of the Purchase Contract and the Title Company will not close unless that is the case.

Unfortunately, this is the area in which foreclosed properties present the most problems. It is common for escrow to be delayed thirty to ninety days in order for the seller to provide the appropriate paperwork to deliver clear title. Be aware of the potential for clouded title and the delays that may incur.

It is Always Best to Use Local Lender Branches in Hawaii

The majority of mainland lenders seem to suffer from delays. If you (and your lender) are not able to meet the strict time frames and deadlines of this REO transaction, it is possible that the seller will terminate the contract and re-market the property instead of grant numerous extensions.

One of the most important things that you need to do is go to a lender FIRST before you start looking at properties. You must be pre-approved for a loan. These properties are often under priced for the market as the condition, etc., is factored into the price.

This means that these properties tend to sell VERY QUICKLY…the majority of the REO’s I list are under contract within one week. So you need to have a solid pre-approval in hand if you intend to submit an offer on a property. The sellers will not even consider your offer without a pre-approval. You will likely be bidding with other buyers for the property you want, so having that pre-approval is essential to your offer.

Overview

Get ready to roll up your shirtsleeves! As mentioned above, REO’s are sold “AS IS”. Most have deferred maintenance and this is factored into the low attractive price that got your attention in the first place. You will have to be open to fixing and/or replacing items in your new purchase. It will take some elbow grease and you’re going to get dirty! However, the end result may well be your dream home, so what’s a little sweat equity between friends? 

Next up comes Part Two – Submitting an Offer on a Foreclosure/REO Property. See you then!