Avoid REO Surprises

Prepare buyers for everything that might happen in the process of closing on a bank-owned property.

June 1, 2011

Just when I thought I’d seen it all, my law firm recently encountered an REO transaction with an interesting twist. One day before the closing, a person filed a complicated 14-page affidavit of ownership against the home, proclaiming rights to the property under a “sovereign nation” theory that has little support under real estate law here in Georgia.

This person, whose name had never appeared in the chain of title, sought to unilaterally declare himself exempt from the laws of the United States. He had even gone so far as to break in, change the locks, and rent the property to an unsuspecting ­tenant. This claimant, who was eventually arrested, and others like him are targeting foreclosed properties because the properties are often unmonitored and easy to identify. This is an extreme example, but it illustrates an important point: REO closings are prone to unusual surprises.

An REO closing is one in which a lender or bank is reselling property following foreclosure. The property is usually one of many, perhaps even thousands, in a bank’s asset portfolio, and the asset manager’s chief objective is to get the property off the bank’s books as quickly and cheaply as possible without subjecting the bank to lingering liability. These asset managers rely heavily on listing agents and form-contract addenda to manage their heavy caseloads.

Because these are not standard transactions, it’s your job to manage the buyer’s expectations.

First, remind buyers that they’re negotiating with an institution, not a warm-blooded seller. Banks do not have an emotional stake, so they’re unlikely to enter into complicated negotiations or be swayed by a buyer’s hardship.

Second, a bank’s asset manager is usually someone who has no knowledge of the property’s history and is in no position to give assurances about the property’s condition. The bank’s primary goal is to make as few representations as possible and to be completely done with the property once it’s closed. That means no lingering responsibility for repairs, no tax reprorations, and no follow-up calls about where to find the water shut-off valve. Buyers need to be thorough in addressing issues prior to closing, because they lose their right to object to property defects once the ink on the deed is dry.

Third, it’s unwise to assume that title to the REO property will be clean. While it is true that a fore­closure sale will wipe out subordinate liens and the bulk of any problems caused by former owners, it won’t work to extinguish the liens of ad valorem taxes or problems that were missed when the previous owner bought the property. It’s smart for anyone purchasing an REO property to buy a policy of owner’s title insurance at closing.

When listing or selling REO property, consider adding the following items to your checklist:

  • Make new keys, ASAP. The lock box key is likely to be the only one available to the buyer, but as always, there is no telling how many people have a copy. Advise the buyer to have the property rekeyed after closing and to reprogram the garage door opener and security gate.
  • Buy a home warranty. Suggest that the buyer purchase a one-year third-party warranty, or negotiate it into the purchase contract, to compensate for the seller’s limited responsibility.
  • Check the title early on. Request that the closing agent provide a clean title report early enough to give everyone time to react to problems before closing, and urge your buyer to purchase an ­owner’s title insurance policy if it’s not provided.

Above all, encourage patience. Allow time between contract execution and the closing date for the ­sellers to get documents to the closing agent. Warn ­buyers that they may need to be flexible if the closing date should need to be postponed a day or two, because the seller’s documents might be buried under a mountain of others.

REOs provide a great opportunity for buyers, but the process can be frustrating. Make it go more smoothly by preparing for the pitfalls.

Vanessa E. Goggans is a partner in the residential real estate practice of Morris, Manning & Martin in Atlanta, representing builders, home buyers, home owners, and lenders. She can be reached at 678-686-6909.