Lots of people ask me, “How do I buy a foreclosure in Loudoun County/Northern Virginia?” There are two ways - one is definitely more popular than the other these days.
Here are the two ways a consumer can buy a foreclosure in Loudoun County/Northern Virginia…
- At the local court house steps during the foreclosure auction. (Yes, there is an actual auctioneer speaking a million miles a minute in that typical auctioneer slang)
- On the open market (including local MLS) once the property is marketed by a listing broker of the bank’s choice.
Let’s look at the first method of buying a foreclosure in Loudoun County/Northern Virginia…
The auction method is tricky and can by filled with pitfalls. Once of the pitfalls is that you have limited access to the property before the auction so you may not get a good idea of what the house looks like or the full scope of work needed to fix it up. There are also many special requirements and nuances to an auction which are different than buying a traditional resale listed through a listing agent/broker on the MLS. Another issue is that there is a “Buyer’s Premium” of 10 - 15 percent of the sales price which you must pay on top of the winning bid price. So your $300K purchase just turned into a $345K purchase.
Even if you get past these issues, there’s one more… The “reserve” price is usually the amount due on the mortgage which is typically higher than the market value of the property. This makes the reserve amount (plus the Buyer’s Premium) an absurd amount of money for the property. The price issue is one of the main reasons why this method is used so rarely these days.
Now let’s look at the second method of buying a foreclosure in Loudoun County/Northern Virginia…
In the current market, this method is used 99% of the time because banks end up taking the property back at auction and then using a listing broker to sell the property on the open market and MLS. This method is also less tricky - as long as you have your own Buyer’s Agent who has a lot of experience working with foreclosures/bank-owned properties and who is looking out for your interests (unlike the listing agent who is looking out for the bank). The transaction is similar to buying a traditional resale in many ways which makes for a smoother transaction than buying at auction. But it’s different in other ways such as “as is” conditions/clauses, bank addenda, etc. This is why you need a Buyer’s Agent who knows what they’re doing with foreclosures/bank-owned properties.
In addition, there is no “Buyer’s Premium”, you get to see the house before submitting an offer, you get to do a home inspection, etc.
Are you intimidated with the prospect of buying a foreclosure in Loudoun County/Northern Virginia?
Don’t be. If you go in educated and with someone in your corner, you’ll find it’s not as crazy of a process as you think. And there’s more good news…Though buying a foreclosure involves much more than buying a traditional resale, it’s a lot less hassle than buying a short-sale.
This post is the quick answer to the question. If you would like to know more or would like to find a foreclosure in Loudoun County or elsewhere in Northern Virginia, click here to contact me.
If you haven’t bought a foreclosure/bank-owned or short-sale property in a while (or ever), you probably don’t know what the typical condition of such a property is. Here’s an idea of what to expect…
I’m working with a buyer who is buying a foreclosure/bank-owned property and did a home inspection this past Tuesday - here is what the inspection revealed:
- Exterior wood rot on upper rake and gutter boards, front window and door
- Gutter is falling - re-secure nails and gutter
- Re-wire attic fan
- Re-connect dryer vent in attic
- Repair 2×4 lateral brace by chimney
- Replace leaking interior hose bib shut-off valve
- Upper bathroom has loose toilet and tank - repair
- All windows are currently painted shut (thank you to Cheryl A for catching my previous typo - oops!) - free up for operation
- Repair small leak on lower powder room vanity trap
- Replace house roofing - interior attic system has severe black mold buildup - replace shingle and plywood - treat or clean attic trusses
How does this inspection compare to others? I have seen much worse and greater items on foreclosure/bank-owned and short-sale properties than this. Items 1 through 9 are typical if not less-than average. Item #10 is big item that is cause for serious concern though it’s not the end of the world. Check out photo of the mold below…
The good thing is that, even though foreclosure/bank-owned and short-sale properties are sold “as is”, banks are typically willing to fix mold issues. And once the necessary repairs have been made, the mold will no longer be an issue. The word “mold” is very scary to banks for a variety of reasons. Banks may either repair the mold issue or credit the buyer the amount to fix it themselves.
This home inspection is just one example of what issues you will come across. Here’s a partial list of some other common items you may see…
- water damage in ceilings/walls from leaky/busted pipes
- water damage in basement due to sump pump not working because property has no electricity
- missing appliances/fixtures
- electrical outlets not functioning
- window seals broken/leaking
- AC condensation line is leaking
- hot water heater is leaking
- bath tub stopper not working properly
- shower diverter not working properly
In the end, you have to add up the cost to purchase with the cost to fix and see whether it’s still a deal or not in the end. Foreclosures/bank-owned and short-sale properties should already be discounted to reflect the cost of fixing them up, but do the math and double check yourself before proceeding with the purchase of the property. Better safe than sorry.
One more thing…if you’re looking for the “perfect” foreclosure/bank-owned property or short-sale with no issues, good luck. If it were in that good of a condition, it would be more expensive to reflect the repairs and condition. You’re not going to get a foreclosure/bank-owned or short-sale property (or any property for that matter including new construction) that does not have at least a few issues that need attention.
Hope this helps. Let me know if you have questions or concerns or if you would like me to go into more detail about anything.
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).
If you’re a home buyer who is considering purchasing a foreclosure/bank-owned property between now and the end of summer, here are a few tips when it comes to previewing these types of properties:
- Dress light and bring a towel - many foreclosure/bank-owned properties don’t have the electricity turned on which means that the air conditioning is not on - 90+ degrees outside can equal 100+ degrees inside
- Don’t wear anything you don’t mind getting dirty - most likely, neither the previous owners nor the bank cleaned the house prior to it coming on the market
- Bring a flashlight - the electricity may be turned off so it’ll be dark in the basement area especially if it’s an inground basement
- Use the bathroom just before you head out to preview homes - the water may be turned off meaning that the toilets are not working
- Consider leaving your children with a family member/friend - the lack of air conditioning makes for extra hot temperatures inside the home which can make kids really cranky, really fast (plus no working toilets)
- Bring something to drink and some snacks - the high temperatures outside and inside the home can make you thirsty and lethargic. If you’re anything like me when you’re really thirsty or hungry, you’re brain will slow down and you won’t be able to focus
If your offer on a bank-owned or short-sale property is "accepted", you will receive the bank's addendum to sign. Many buyers (and their agents) just skim through it, sign on the dotted line and send it back to the listing agent. But they don't truly understand what the addendum says nor how it could affect them.
Some say, "It's just an addendum. The original sales contract has been accepted and those terms are what count."
The bank's addendum always has language in it that says something similar to, "This addendum supersedes the terms of the contract of sale and all other addendum." or "In the event any provision of this addendum conflicts in whole or in part with the terms of the contract of sale, the provisions of this addendum shall control."
In layman's terms…the bank's addendum trumps any and all terms of your original offer which you thought the bank "accepted" and "agreed to".
Some of the most commons things in the sales contract that are trumped by the bank's addendum are
- contingency time frames
- inspections (or lack thereof)
- termite inspection/remediation
- closing cost assistance/concessions
- transfer taxes/tax stamps
- HOA assessments
- real estate broker commissions
All of these could potentially have a big financial and legal impact on a buyer. Every buyer should fully understand what the terms of the bank's addendum really say and mean.
Let's look at an example…
Let's say you put "10 days" for the financing contingency, but the bank addendum says "buyer's time frame for financing contingency is 5 days". You don't notice and your agent doesn't notice. You, your agent and, more importantly, your lender doesn't notice. Your lender thinks he has 10 days to get final approval on your loan and is working on your loan accordingly.
On day 7, your lender comes back and says, "Sorry, the underwriter found some things they weren't happy with and wouldn't approve you for a loan." You immediately call your buyer's agent and say, "I couldn't get final approval so get me out of the contract using the financing contingency."
Your agent calls the listing agent to get you out of the contract only to find out that you are S.O.L. because the financing contingency is only 5 days per the bank addendum (which you signed 7 days ago). You've gone from getting out of the contract to forfeiting your earnest money deposit.
(This actually happened to a buyer who had a ratified contract on one of my friend's/fellow Realtor's listings)
Btw…If you're wondering whether you can change or counter and of the terms of the bank addendum, the answer is "no". If you want to buy the property, you have to agree to the terms as they are.
If you don't like the terms, feel free to back-out and look for another property. But all bank-owned and short-sale properties have bank addendums that all pretty much say the same thing using different fancy words.
So next time you go to buy a bank-owned or short-sale property, make sure you have a buyer's agent that knows what they're doing and that you read the bank addendum carefully and in its entirety. If you don't, you could get burned badly.
You may be wondering if you're able to do a home inspection on a foreclosure/bank-owned or short-sale property prior to writing an offer or afterwards. Well, the answer is "no" and "maybe". The "no" is the easy part - the "maybe" is where it gets tricky.
The easy part…You definitely do not get to do a home inspection prior to submitting an offer. That's the case with most all residential real estate sales - foreclosures/bank-owned properties, short-sales, traditional resales and new construction.
The tricky part…you may or may not be allowed to do an inspection of the property after verbal or written ratification. Let me explain…
Some banks will let you do an inspection of the property within a certain time frame from the date of ratification, either written or verbal ratification. If that's the case, you can have the property inspected and if there are "material deficiencies" (e.g. cracked foundation, water damage, holes in the roof), you can give notice to the bank and walk-away from the contract. You must provide the inspection report noting the "material deficiences" along with the notice that you're walking away within the specified time frame.
Some banks will not allow you to conduct an inspection nor have a clause that lets you pull out of the deal if you find something "wrong with the property" after the contract has been ratified. And no…you can't just ask your agent to "open the door for you" and let you waltz around the house doing an inspection anyway.
The contract will most likely state that the bank will give you "reasonable access to the property" and accessing the property for an inspection that is not agreed upon in the contract is not "reasonable". I'm not a lawyer, but I wouldn't be shocked to find out that the bank may view something like that as trespassing and possibly a breach of contract. (Thank goodness that I've never had to find that out for real)
How do you know if an inspection is allowed and whether there's a clause that protects you and leaves you a way out?
Have your agent find out for you or, if you're in Dual Agency, ask the listing agent (I do NOT recommend Dual Agency, but that's for another post). There are other ways to protect yourself such as putting certain language in your offer, but I won't get into details about that here on this post.
And make sure you find stuff like this out before you write an offer so you're not wasting your time nor getting stuck buying a property that ends up being a lot more hassle and work than you originally thought.
Back in October, I wrote a post entitled, "Read This Before Writing an Offer on a Bank-Owned Property", which cited several things from a post over at Agent Genius. I'm writing a similar post today because some things have changed while others need to be reinforced. So here goes…
Foreclosures/bank-owned properties are quite different from traditional resales. There are many things to consider and understand before writing an offer on a foreclosure/bank-owned property. For starters, here are the top 10 things you should know before writing an offer on a foreclosure/bank-owned property (click on links for greater explanation):
- Properties are sold "AS IS" - All properties are sold "AS IS" in their present condition. If you are using FHA financing, this may present a problem.
- Multiple offers - If the bank receives multiple offers, buyers may be requested to submit their "highest, best and final offer" by a specific date and time. All offers received by that date will be presented at the same time.
- Proof of Financing/Funds - All offers must have a lender letter with loan and approval amount indicated in the letter or proof of funds otherwise the bank will not respond.
- Countrywide/GMAC-owned properties - If the property is being sold by Countrywide, you must also provide a lender letter from Countrywide prior to or along with your offer otherwise Countrywide will not review your offer. (The same goes for some properties being sold by GMAC - ask your agent to check the MRIS/MLS remarks section of the listing)
- Delay of settlement - If the closing is delayed due to the buyer's inability to obtain financing after the financing contingency has been removed or if the buyer's lender delays settlement by not having the loan docs or funds ready by the settlement date, the bank will typically charge the buyer $100.00 per day.
- Bank addendums - All bank-owned properties have their own set of addendums. They supercede the Regional Sales Contract or other such contracts. Sometimes, these addendums must be signed and submitted at the same time as the offer. Other times, the addendums will be provided to the buyer after their offer is accepted. Until all the addendums have been signed and delivered, the contract is typically not considered "ratified" and the bank may sometimes continue to market the property for sale.
- Response time - Response time on foreclosures/bank-owned properties can vary from 24 hours to several days or a week. In the case of Freddie Mac or Fannie Mae owned properties, a verbal response may take several days while a written response may take several weeks.
- "Sale of Home" contingency - Banks will not accept "Sale of Home" contingent contracts - no exceptions.
- Title company - Banks will want to close at a title company of their choice and do not like to do "split settlements". The bank addendums that you must sign to purchase the property will state that you agree to using the title company the seller has chosen.
- Inspection/utilities - If the property has been winterized and if the buyer is allowed to do an inspection, the buyer must ask for permission from the seller to dewinterize the property just prior to the inspection and rewinterized immediately after inspection. Not every bank allows an inspection so check on that before submitting an offer.
There are other nuances and things to be aware of, but these ten are some of the most important. If you have any questions, feel free to drop me a line - danilo.bogdanovic (at) gmail (dot) com or 703.582.6900 (cell).
Foreclosure and short-sale properties are all sold "AS IS". But what does "AS IS" really mean?
"AS IS" means that what you see is what you get. Ninety-nine percent of the time, the seller (bank) will not make any repairs to the property (the one percent is FHA financing-post on that coming soon). It also means that the extent of the seller's obligation with respect to title will be to provide insurable title to the purchaser.
Here's an excerpt from an "AS IS" clause from Freddie Mac:
"Purchaser understands that the seller obtained the property by foreclosure, deed in lieu or foreclosure, forfeiture or similar process and consequently, seller has little or no direct knowledge regarding the condition of the property. Purchaser accepts the Property in "AS IS" condition at the date of the Contract of Sale, including, without limitation, any defects or environmental conditions affecting the Property, known or unknown.
Purchaser acknowledges that neither the seller nor its agents have made any warranties, implied or expressed, relating to the condition of the Property."
Here's an excerpt from an "AS IS" clause from IndyMac Bank:
"Buyer acknowledges and understands that the Property is being purchased and sold as-is, where-is and with all faults. Buyer further acknolwedges and understands that the Property was acquired by Seller through a foreclosure or other similar action and therefore, Seller is not an owner-occupant and Seller's information concerning the Property and its condition is extremely limited. Accordingly, Buyer acknowledges and understands that, except as otherwise disclosed in writing to Buyer, Seller is unaware of any latent defects in the Property or any appurtenant systems including, without limitation, plumbing, heating, air conditioning and electrical systems, fixtures, appliances, roof, sewers, septic, soil conditions, foundation, structural integrity, environmental condition, pool or related equipment. Seller makes no representations or warranties as to (i) the condition of the Property or any of the Property's systems or improvements, or (ii) the serviceability or fitness for a particular use of the Property or any component of the Property."
As you can see, "AS IS" clauses are also a huge C.Y.A. for the banks. As a buyer, you must understand that the property is sold "AS IS" and that you'll need cash and/or sweat equity of your own to fix it up.
For those of you that have the cash and/or sweat equity to perform the repairs, there are some great bank-owned deals out there, especially from Fannie Mae and Freddie Mac. For those who don't have the cash or sweat equity to invest in a foreclosure property, don't worry…there are great deals on foreclosures that require very little work, as well as on traditional resales.
NOTE: This is not meant as legal advice nor should it be taken as such. For guidance on any and all "AS IS" clauses and contracts in general, contact an attorney.
For those of you who are planning on writing an offer on a bank-owned/foreclosure property, know this…certain banks such as IndyMac will not pay for any of your discount or "buy-down" points. IndyMac and certain other banks will send you an "addendum" after the contract and bank addendums have been signed (aka ratified) with several provisions in it, one of them being:
"Seller's closing costs not to pay for discount points and/or buy down points."
What does this mean to you as a buyer? It means that you'd better make sure you plan on paying any discount or "buy down" points out of your own pocket if you're trying to buy an IndyMac owned foreclosure property.
What if the bank agreed in writing to pay ______ amount in seller closing cost assistance and part of your closing costs is a buy-down point(s)? Even if these points are part of your closing costs which the bank agreed to pay for as part of the contract and bank addendum, the bank will refuse to pay for them.
Is it starting to smell fishy in here? Keep on reading, the smell gets stronger.
The person authorized to initial and sign the contract and bank addendums on behalf of the bank tends to forget to initial the contract in 2 or 3 places almost every time.
This brings up several questions:
- If the offer was already ratified, is the "addendum" really just an "ammendment"?
- If the offer was already ratified, does the buyer have to sign and agree to the "addendum"?
- If the buyer refuses to sign the "addendum", does the bank have the right to not move forward with selling you the property?
- Is the person authorized to initial and sign for the bank accidentally or purposefully leaving a few initials missing so one could argue that the contract wasn't technically "ratified"?
- Is the bank using the missing initials and "not technically ratified" as a way to coerce a buyer into signing the "will not pay for discount and/or buy down points addendum" and/or leaving the bank a way out of the contract?
- And lastly, is what they're doing right or wrong? If wrong, what can be done to stop it from continuing to happen.
I am not a lawyer and therefore will not get into legal-ease. This is a matter that should be referred to a lawyer for clarification and guidance.
What I will say is that I personally believe and it's my personal opinion that it doesn't seem right for a seller to accept and agree in writing to an offer that includes seller closing cost assistance and then come back later and say, "but I won't pay any discount or buy down points as part of the closing cost assistance I originally agreed to in writing".
Wait, there's more. Hold your nose real tight and breathe through your mouth cause the smell's gonna get worse…
Some of these banks don't bother to tell the listing agents that are listing their properties that this policy or the "extra addendum" even exist.
Despite this policy by these certain banks, is there a way to still get up to 1 point paid for by the bank? Yes, there is. Knowing this loophole is key to negotiating with banks.
Moral of the story? Be careful out there and make sure your buyer's agent knows what they're doing when it comes to foreclosures/bank-owned properties and dealing with the various banks out there.
If you're considering writing an offer on a foreclosure/bank-owned property, you need to read the post entitled "20 Things You Should Know When Writing An Offer on a R.E.O. Property" over at Agent Genius. Though it's for agents, most of the items pertain to buyers.
Here's an excerpt:
#1 Verbal offers are rarely accepted, considered, or responded to.
#2. Seller is an institution or government agency and does not respond to offers on weekends or holidays. Offers presented during these times will be presented the following business day!
#3. Be aware, the possibility of multiple offers exists, all offers will be presented to seller. Please read items 4-8 carefully.
#4. Seller is looking for HIGHEST AND BEST OFFER, this means that the highest offer may not be accepted. The institution definitely weighs all of the risks associated with offers. Contingencies and sales terms are considered to determine with whom they will enter into contract.
#5. Response times of 5 to 7 business days or longer are not unusual. Your offer will sometimes require the signatures of multiple parties. Be advised that all efforts are being made to give the buyer a timely response. The listing agent has no control over this time frame! The listing agent has the same desire as you, to see a successful closing!
#6. Due to the nature of R.E.O’s, once there is an acceptance of your offer, the usual turn around time for an executed (fully signed) contract is 7 to 10 business days.
#7. Because of items 2 - 6, once an offer has been sent to the seller for FINAL (fully signed) approval, all offers after that are considered back up offers.
#8. Seller may respond with a “reject offer” with no counter.
The remaining 12 items are also important so make sure you check out the full post. If you have any questions on any of the items or need clarification, don't hesitate to contact me - email@example.com or 703.582.6900.