I had the opportunity to attend an excellent “REO Contracts” (aka “contracts on bank-owned properties”) class yesterday presented by Keith Barrett, Esq of Champion Title in Leesburg, Virginia. The class went over some of the main pitfalls of REO contracts and what to look out for as a Buyer’s Agent or as a buyer of a bank-owned property.
Though the REO contracts class was for real estate agents/brokers, everything covered in the class directly affects buyers of bank-owned properties. That’s why I wanted to share the key points of the presentation with you, the home buyer.
DISCLAIMER: Nothing within this post is intended as legal advice or comprehensive answers to all questions, nuances, etc. that may come up in particular transactions. Consult an attorney for guidance. The following points were derived from the material given to attendees as part of yesterday’s REO contracts presentation.
Practical Considerations of REO Contracts
- The buyer is generally getting the benefit of their bargain up front in the price - not in the ease or speed of the transaction
- The seller is a corporate entity, which is both positive and negative. You don’t have to deal with an emotional seller that has unrealistic expectations about property value, etc. On the other hand, sometimes big corporate sellers “do what they want.” These banks are selling properties all over the U.S. making it difficult to conform to local custom and practice
- Approximately half of all REO transactions do not close on time. Have a plan B should settlement be delayed (e.g. don’t schedule contractors to come out to the property the day after settlement, don’t settle on a Friday especially not before a long holiday weekend, etc)
- Some bank sellers take the position that if the REO addendum is silent on an issue addressed in the original offer, that is a conflict and the REO addendum controls/prevails (e.g. appliances, home warranty, seller closing cost credit, etc). If something that you “agreed upon” in the original offer/contract is not listed/addressed in the REO addendum, the bank seller may argue that it’s not part of the contract
- Even though the property is sold “as is”, there may be room for negotiation on a case by case basis
- HOA Disclosure package - by law, the bank seller should provide this
- Residential Property Disclosure Statement - by law, the bank seller is exempt from providing this
- Make sure you change the locks immediately after you take possession of the property
- Consider a longer rate lock period on financing from your lender - about 50 percent of REO transactions do not close on time
- The latest revision to CRESPA (Consumer Real Estate Settlement Protection Act) states that the buyer’s right to choose a settlement agent/title company can not be varied or waived by any agreement - including an REO addendum (effective July 1, 2009)
Once again, this is not intended as legal advice. Every bank’s addendum and every transaction is different. I’ve even seen different versions of an REO addendum from the same bank.
Point is…be smart, read the entire addendum and know how the addendum affects the transaction and you as the buyer (even if that means consulting a real estate lawyer). But also know that bank sellers “do what they want” so even though it may seem “wrong” or “unfair”, there may be little, if any chance of getting the bank to change the language in the addendum.
And if you have any specific legal questions regarding REO contracts or real estate law in general, don’t hesitate to email or call (703.443.1010) Keith Barret, Esq directly - he’s knowledgeable, experienced and tells it like it is (though I have no idea what his hourly rate is as a real estate lawyer).
Some of you may be wondering how you can go about selling your home the “short-sale” route, but aren’t sure how it works. Well, here’s what I call a “Seller’s Guide to the Short Sale Process”…
First and foremost, let’s define “short-sale” as it relates to real estate today:
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold
If you’re not sure whether you’ll be “short” if you sell the house, hire an appraiser or ask a Realtor to do a CMA for you and deduct the balance of your mortgage(s), any line of credit(s), other lien(s) and cost of sale from the estimated market value of your property. Once you’ve done that, you’ll have a good idea of whether you’re “short” (assuming the appraisal or CMA are accurate).
Let’s assume that you’re “short” and want to move forward with a short-sale. What are the next steps.
Well, fellow Virginia Realtors and bloggers Sarah Stelmok and Jeremy Hart beat me to the punch by about 24 hours with their posts on short-sales. So, with their permission, I’m going to cite their explanation about the process to save some time.
If you are a Seller considering a Short Sale in your property, you will need to gather the following information:
- All lien holders names and contact information
- All loan numbers
- A Third Party Authorization Form - this will allow the bank to discuss your short sale with your REALTOR. It needs to be agent and loan # specific and have an indefinite end date Some banks have their own form; others will accept any form you prepare. You need to get this to the bank as soon as you hire a REALTOR.
- Listing Agreement - this should include a CMA of the property to justify your list price
- 2008 and 2009 W-2s - or the tax forms that you filed if you do not get W-2s.
- A Profit/ Loss Worksheet for 2009
- Last 2 Month’s Bank Statements
- Proof of Disability or Unemployment or Job Transfer (if applicable)
- Hardship Letter - this explains why you want to short sale and why the bank should allow you to short sale
Once you have all of these items, the next steps are…
1. List the property for sale– Some banks want the property listed for the amount that is owed first, and they will be willing to drop to a more realistic price after a period of time. The listing agent will need to back up their list price with a good CMA! Remember, a BPO will be called out as soon as they receive a contract.
2. Receive and ratify a contract – needs to be ratified by the seller and buyer. Some banks want one contract at a time; others want to see them as they come in. Another reason to contact the bank ASAP.
3. Send Contract to Bank - get confirmation from the loss mitigation offer at the bank and preferably written proof of receipt
4. You will also need to send – all of the paperwork including the hardship letter you gathered/prepared prior to listing your property for sale (see earlier part of this post). The bank may ask for other items not listed here. They may also send you additional forms and paperwork for you and/or your agent to sign.
5. Be persistent, but patient - Make sure you ask how long it will take for a contract to work its way through the system. You want to hear it will take 30-45 days, but they may tell you that it will take just that long for them to even look at the file as is the case with CitiMortgage. You also want to ask about the likelihood the loan will be sold. They like to sell the loans right before they give you approval, and you’ll have to start the process all over if they do.
6. Stay as current as possible - Make sure you don’t get more than 2 months behind. Some banks will allow you to get up to 9 months behind, but they are harder to negotiate and keep off the auction block. If you don’t know what their policy is, ask.
These steps will need to be done for each bank that is involved and each bank has their own process. Some banks that are in 2nd position (2nd trust/mortgage) will only start processing their short-sale after they’ve received written short-sale approval from the 1st trust. This means that the overall short-sale approval process may take twice as long with two trusts/mortgages.
If you are considering pursuing the Short Sale route to sell your home, it is important that you consult an attorney that is familiar with the process. It is also important that you use a REALTOR who is trained in the short-sale process and has experience in Short Sales.
So I hope that this helps you out (thanks again Sarah and Jeremy). If you’re in a situation where you’re about to fall behind on your mortgage and/or are considering a Short Sale, contact me to chat about it and see what options you have.
It’s like the Wild West right now when it comes to short-sales in Loudoun County (and the entire Northern VA area). Some take 60 days to settle while others take 6 months (if they settle at all). Some are handled by agents, title companies and negotiators that know what they’re doing while others are not. The list goes on…
That’s why every buyer (and buyer’s agent) should ask the listing agent/broker (or seller if FSBO) the following 10 questions before they write an offer on a short-sale…
- Have you received any other offers that you are waiting to hear back on from the bank?
- How many trusts are involved that will be “short”?
- How many total banks/creditors are involved in the short-sale and which banks/creditors are they?
- Have you requested and received the short-sale package from the bank(s) including the hardship letter?
- Have you sent the package and confirmed receipt?
- Has the asking price been approved by the bank(s)/creditor(s)?
- Who is negotiating the short-sale with the bank(s)/creditor(s) - you, a negotiator, a lawyer, the title company or….?
- Has the seller/borrower completely stopped making payments on their loan(s)?
- Is the seller willing to hold a note with the bank for the difference? (much better for their credit score)?
- How many short-sales have you (the listing agent) closed within the past 12 months?
If the listing agent balks at answering these questions, it’s either because the seller does not wish to disclose the information and/or the listing agent may not know what they’re doing. Either way, if you don’t have the answers to all of these questions, you can’t make a very educated decision as to whether it’s worth writing an offer on the property or not.
Why? Here are just a few of the reasons…
- Different banks have different approval percentages and varying time frames for processing the short-sale. For example, if you have to move within the next 60 to 90 days, a short-sale being negotiated with CitiMortgage may not be something you want to pursue. If the short-sale is being negotiated with IndyMac, you will be talking to folks in a call center in another part of the world (literally) that care little about your short-sale (or IndyMac for that matter because IndyMac no longer exists)
- If the agent, title company and/or negotiator has not negotiated/closed many short-sales, they may not know what they’re doing which lowers the chance of the short-sale being approved and you being able to actually buy the property.
- If there is more than one trust, the total approval process time doubles because the second trust typically does not start their approval process until they have written approval from the first trust.
The 10 questions listed above are very similar to the 10 questions that Frank Llosa recommends asking before seeing a short-sale in one of his (excellent) posts. One question that Frank has on his list that I don’t have on mine is…
- How long do you estimate that the lender will take to provide an answer to an offer?
The reason why I don’t have it as one of my questions is because I’ve found that some agents just throw a date out there that they pulled out of thin air. For example, one agent told me the other day that she could have an approval and settle on the short-sale “within 45 days at the most” despite the short-sale being through Countrywide who is running way behind on short-sale approvals due to their recent merger with Bank of America which involved physically moving many offices, computers, files and employees.
Forty-five days? Riiiiiight… And I have a great deal on some ocean-front property in Arizona. No, really!
Rather than relying on what the listing agent tells you, your Buyer’s Agent should know and be keeping up with the nuances and latest news regarding each individual bank/lender’s short-sale approval process and how long it typically takes. This includes anything and everything that could affect the length of time it could take (such as the Countrywide/BoA example above).
Important: If a Buyer’s Agent tries to get you to blindly write an offer on a short-sale without asking these questions first or the listing agent is not willing to answer them, be wary and look at your other options.
On a related note…I will be writing a post on which banks are the fastest at approving short-sales, which are the slowest and which banks are the easiest to deal with from a sellers and buyers standpoint. Keep an eye out for that later this week.