REO/Foreclosure Property

When a homeowner defaults on a mortgage loan, then the lender repossesses the property through a process called “foreclosure.” Once the lender legally forecloses on the property, by law they cannot hold onto the property; they must sell. There are two methods a lender sells foreclosed properties. First is an “auction.” A lender typically will ask for the outstanding loan amount as the opening bid. If no bidders are interested, then the bank will repossess the property and market it as a “REO” (a bank “real estate owned”) property. Generally, the lender will clear up any tax or other liens and encumbrances, evict tenants (if necessary), and pay the outstanding condominium fees (if applicable). Most often, the lender will give the listing to a local real estate agent to market and sell the distressed property. Lenders do not usually maintain and upkeep foreclosed properties, so Buyers can generally purchase the distressed properties at a discount.

Caveat Emptor Or “Buyer Beware”

Purchasing a foreclosed property is filled with many traps for the unwary. A foreclosure legal proceeding takes many months, and must meet exacting legal requirements. If any part of the foreclosure process is deficient, then the entire proceeding is invalidated. In Massachusetts for example, if the lender of record does not properly execute an assignment to the service company or “pool” handling the proceeding, then state courts can invalidate the foreclosure. See our blog post on the U.S. Bank v. Ibanez case. Thus, it is essential to have a qualified and experienced real estate attorney diligently review the title exam of the foreclosure transaction. An experienced real estate attorney should look at all foreclosure documents, reviewing their dates, the officers of the banks that signed the documents, and ensuring that each officer had authority to sign by virtue of a separate recorded document. In addition, the attorney should carefully look at the certified mail “green cards” to ensure that the lender properly gave notice to the foreclosed homeowner. Above all, an owner’s policy of title insurance should be issued to the buyer of any foreclosed property.

Some final points to consider

  • It is common for REOs to be sold in “as-is, where-is” condition
  • “I need to sell my house first” contingencies are rarely allowed
  • To submit an offer, Lenders often require a Full Pre-Approval Letter
  • Some banks do not allow changes to the Purchase & Sales Contract
  • Minimum deposit amounts are commonplace
  • Banks may charge a per-diem if you are unable to close on time
  • And it’s not uncommon for many REOs to be “fixer-uppers”