Active Rain January 27, 2009

If You Are Going to Buy a Bank Owned Foreclosure, Read This.

I should first disclose that I am not, nor have I been in the past, an REO Broker. I have purchased them myself and I have represented buyers in the transactions many times over the years. It is as different an area of real estate from typical transactions as Podiatry is from Opthamology in medicine.These are things consumers must know before they purchase a bank-owned REO property here in my home state of New York. Most of the principles apply universally.

  1. You should absolutely use an attorney who is FAMILIAR and EXPERIENCED with the purchase of bank-owned properties if you buy an REO (Real Estate Owned-by the lender) in the state of New York.  Even if your employer or union is providing you with subsidized or free legal representation, use of the wrong attorney can negate whatever perceived savings you are getting in the purchase, add to your stress level, and still have you poorly represented. This is, of course, to say nothing of the needless time and energy the other attorney and agents will have to expend bringing your attorney up to speed.
  2. You are not being rushed-you are being given deadlines for efficiency. This is why you need an experienced attorney who won’t gasp or get the vapors about having to take shorter than a week to do anything. Lawyers typically operate at a casual pace in property transactions, but REO transactions have to go at a far faster pace, not because anyone is trying to bamboozle you, but because this is a NON PERFORMING ASSET and TIME IS OF THE ESSENCE. Not only that, there may be competing offers that they can go to if you or your attorney are going to dilly dally. So, a document that says “please sign and return tomorrow” really does need to be signed and faxed tomorrow.
  3. You are buying the house “AS IS.” Nobody will dissuade you from getting an inspection, but unless there is an environmental issue, it is for your volition only. The bank will not make repairs. The bank will not put GFCI outlets near the sinks. The bank will not put new batteries in the smoke detectors. Do your inspection BEFORE you make the offer, because once you make the offer the clock is ticking with deadlines (see #1 and #2). You are already being compensated for the physical issues of the property with a lower sales price, often far more of a discount than market value less repairs.
  4. You cannot speak with the bank. If you run into frustration or red tape, no, you cannot speak with the bank. I know it would be great to just have your lawyer and the bank iron the issue out, but “the bank” is not “the bank” as you know it. “The bank” is an overworked, underpaid asset manager in another state who will hang up on you so fast you won’t even know she answered. Why? For the same reason you’d be escorted out of surgery, a radio studio, an underwriter’s office, or court. People in those places are doing their jobs and do them better without your interference. Those are not settings for the public and your interference hurts the other people who, like you, are waiting. 
  5. You have to pay the transfer tax the seller usually pays. This raises your closing costs a bit, but the lender is losing a ton of money on this deal and needs to economize where possible. Every lender does it. It is an established practice. It is part of the cost of doing business and worth the overall discount you are getting in your sales price for this property.
  6. Exceptions cannot be made.If you are buying an REO in 2009 you are participating in the largest liquidation of property in the history of the planet. It is a huge undertaking that will completely break down if systems, efficiency and deadlines are subordinated to individual exceptions and personal requests. All large organizations have to operate this way or they will cease to be large organizations. Think of it this way: You have a certain cell phone plan. You can’t change it on a temporary basis or get the phone company to make an exception unless you pay for another plan.

Many in the public are rightly intrigued by the prospect of buying an inexpensive, bank-owned property at a discount from the norm. That is the Rose. The thorn is that the process is far less touchy feely and far more cold and automated. However, forewarned is forearmed, and knowing these things going in will enable you to be ahead of the process and not at the mercy of new, unwelcome discoveries. You should still enjoy that purchase, but you have to understand the rules going in.