Many REALTORS® experience great frustration as they attempt to assist a buyer purchase a property owned by a bank – a Real Estate Owned (REO) property. REOs are bought and sold in a world that tends to work under an entirely different set of rules and standards. Although there are no magic answers, understanding what may be in store for the buyer may help make the process a little less stressful.

When a lender forecloses on a property and the property goes to sheriff’s sale, the lender will often bid its mortgage and purchase the property. The lender will then receive a sheriff’s deed to what has now officially become a REO. Rather than manage and sell the REO in-house as in the past, the lender turns the property over to a national asset management company thousands of miles away.

Lenders and their asset managers were unprepared for the volume of REO property they are now struggling to manage. They did not (and some apparently still do not) have the systems or staff in place to deal with the onslaught. There is a logjam of properties and transactions, and many asset managers and lenders are operating with inexperienced and, perhaps at times, incompetent personnel.

A recent informal poll of Wisconsin REALTORS® Association members reveals that while some REOs are handled relatively well, many asset managers and lenders are causing REALTORS® and buyers to want to pull their hair out, and stress and frustration are widespread. The following are some observations based on your input.

1. EXPECT DELAYS

While there are some REO asset managers who are fairly prompt with their responses, many REALTORS® report that waiting for an answer is challenging. The wait time for a response to an offer varies, but overall is reported to be slow – from five to 10 days to as long as six weeks – for those who are lucky enough to get a response. In some cases lenders are apparently getting multiple offers and taking weeks to respond and choose the best one.

2. ASSET MANAGERS

REO properties are handled by regional or national asset managers who enter into listing contracts for the sale of a typically large inventory of properties. These asset managers are not located in the state and are generally unfamiliar with Wisconsin law. Some asset managers are pretty good – they view the negotiation as a business without an emotional component. Others are reportedly bad – they can be extremely rude and abrasive and may not really understand the documents they are working with.

3. REO ADDENDA

A buyer’s initial offer to purchase may be submitted on a familiar Wisconsin form, but the written response from the asset manager will invariably be a lengthy REO addendum that overrides most of the offer to purchase provisions. This addendum is written by the lender’s legal counsel and may be very difficult for buyers to understand. The buyer may need legal counsel to interpret the addendum, and the attorney’s advice may be that the buyer should never sign such a heavy-handed document. Some REO addenda provisions require that the buyer pay for the title insurance policy and the real estate transfer fee, allow only five days for inspections and 14 days for financing, require non-refundable earnest money or charge the buyer a daily fee for a delayed closing (when there is no penalty if the seller causes the closing to be delayed). The REO addendum generally is non-negotiable and cannot be altered. Some buyers have backed out of deals after seeing the REO addendum, angered that it essentially strips the buyer of any recourse or rights.

4. VERBAL NEGOTIATIONS

Just like what happened in the late 1990s when REALTORS® and buyers had difficulty working with relocation companies (see Legal Update 98.04, “Relocation Company Sales,” online at www.wra.org/LU9804), REALTORS® and buyers today are frustrated when asset managers provide verbal responses and will not counter offers in writing. Once a sale is verbally finalized, it is discouraging when the lender reveals that there is another offer and asks for the buyer’s highest and best price, changes the terms and conditions of the buyer’s offer or indicates that they have accepted another offer. Many asset managers and lenders, however, operate under a system in which the asset manager may have the ability to give a conditional approval or acceptance, but final acceptance requires the lender’s corporate approval. In other words, it may be a very long time before there is actually a contract signed by the buyer and the seller – in some REO transactions the signed offer is not received until shortly before or even after closing.

5. CLOSING DELAYS

Closing on a REO property can be quite a challenge. Closings are often delayed for days or even weeks due to lender/asset manager difficulties getting the deed, the final signed HUD, title work and other closing documentation to closing on time. In some cases there are problems when charges, such as delinquent utility bills or subdivision association dues, do not appear on the closing statements; the REO seller will not reimburse any charges after closing.

6. TITLE PROBLEMS

The title companies used in REO transactions often are unorganized and unfamiliar with Wisconsin law and practice. There may be confusion over several items, such as acreage (when partial releases are required), obtaining rental weatherization stipulations, unsatisfied secondary liens still on title or whether a foreclosure is still required when a seller gave the lender a deed in lieu of foreclosure. Problems often exist when the asset manager is working with an out-of-state title company, but there is rarely a hitch when a Wisconsin title company is preparing the title policies.

7. AS IS, WHERE IS

REO transactions are “as is, where is” transactions. That means that the seller will not provide a Real Estate Condition Report or give any other disclosures about the condition of the property. It also means that asset mangers will rarely ever make any repairs from the lender/seller’s funds.

8. INSPECT THE DISREPAIR

REO sellers will fail to disclose major ongoing problems like a property with frozen or leaking pipes or a failed septic system, even if they have been specifically informed. So it is critical that the buyer inspect the property. One common obstacle is that the power or other utilities have been turned off. One REALTOR® reported that the day before the well water test, someone was there to winterize the plumbing, causing the buyer to have to to pay for the water to be turned back on. Others reported that in some cases the properties are being vandalized; when property is not secured properly there may be safety concerns associated with any showing or inspection.

9. MINIMIZE THE PAIN

The best approach to all this madness is to prepare the buyer to expect the worst and to be happy if things work out more smoothly than predicted. Make sure the buyer knows to expect delays and the imposition of harsh REO addendum terms. Some brokers ask buyers to read and sign REO purchasing information sheets that briefly describe many of the quirks and obstacles in the REO buying process.

Understand that although REO asset managers negotiate verbally, there is never a legal binding contract under Wisconsin law until there is an agreement signed by both parties; don’t mislead buyers into thinking otherwise.

Ask where the title company and attorney working on the transaction are located – if they are in Wisconsin, there should be fewer problems getting to closing.

10. AND THE GOOD NEWS IS…

If the buyer has a pre-approval or cash, no property to sell, the hide of a rhinoceros and the patience of a saint, a very good deal may be waiting around the corner. Some investors and buyers are getting some nice deals as a reward for their patience and willingness to bend to the REO’s one-sided terms and conditions.

Debbi Conrad is the Director of Legal Affairs for the Wisconsin REALTORS® Association.